Social Contracts as Assets: A Possible Solution to the Time-Consistency Problem.

The authors present a new solution to the time-consistency problem that appears capable of enforcing ex ante policy i n settings where other enforcement mechanisms do not work. The soluti on involves a social contract that specifies the optimal ex ante poli cy and is effectively sold by successive old generations to successiv e young generations, who pay for the social contract through intergen erational transfers. Both old and young generations have an economic incentive to fulfill the social contract. The authors apply the solut ion to show how an equilibrium without excessive capital taxation can be enforced, despite an ongoing temptation to impose ex post capital levies. Copyright 1988 by American Economic Association.