Forward and Backward Intergenerational Goods: Why Is Social Security Good for the Environment

This paper studies the ability of nonmarket institutions to invest optimally in forward intergenerational goods (FIGs), such as education and the environment, when agents are sel sh or exhibit paternalistic altruism. We show that backward intergenerational goods (BIGs), such as social security, play a crucial role in sustaining investment in FIGs: without them investment is inef ciently low, but with them optimal investment is possible. We also show that making the provision of BIGs mandatory crowds out the voluntary provision of FIGs, and that population aging can increase investment in FIGs. (JEL H0, H3, H4, H5, H6, D1, D7). “Why should I care about future generations? What have they done for me? ” (Addison) “Be nice to your children, they will pick your nursing home. ” (Anonymous bumper sticker) Every society uses a range of nonmarket in-stitutions to decide how much to invest in future generations. A prominent example is the gov-ernment and the decision of how much to invest on intergenerational (IG) public goods1 such as environmental preservation and pure science. These programs entail a transfer to future gen-erations since they are nanced with taxes on present generations and their bene ts are long-lived. Another prominent example is the family. Every generation of parents decides how much to invest in their children. Investments include the cost of (public and private) education, and the myriad of other sacri ces that parents make for their children. These examples have a common structure. First, IG exchange takes place in an in nitely lived organization that has an overlapping gen-erations (OLG) structure. Second, present gen-erations have to decide how many resources to devote to investments that disproportionately bene t future generations. Third, once the in-vestments are made, future generations cannot be excluded from the bene ts that are gener-ated.2 Fourth, since future generations have not yet been born, present and future genera-tions cannot negotiate binding contracts that reimburse present generations for the cost of the investment.3 Fifth, membership in th