Sustainability and intergenerational transfers

Abstract

This paper investigates the intergenerational allocation of a non-renewable resource within an overlapping generations model. Sustainability is defined as a nondecreasing total value of the capital and resource stock. Without forced intergenerational transfers or sufficiently high bequest motives a sustainable allocation is very unlikely to be reached. A tax on the property of the old generation and a tax on resource extraction is investigated. In a numerical example the interaction between the resource extraction decision, the intertemporal consumption decision, and the investment decision are illustrated. It turns out that both types of taxes display shortcomings in creating the incentives for reaching a sustainable allocation.