Discounting and altruism to future decision-makers

Can a generation’s discounting of future generations’ consumption utilities be interpreted as “pure” altruism towards future generations, that is, a concern that these are better off according to their likewise forward-looking preferences? It turns out that the answer is positive for many but not all discount functions used in the economics literature. In particular, traditional exponential discounting is consistent with altruism towards the next generation, and “hyperbolic” discounting of the form used by Phelps and Pollak (1968) and Laibson (1997) is consistent with altruism to all future generations. More generally, we provide one sufficient and one necessary condition for a discount function to be consistent with altruism, and we establish a recursive functional equation which defines a one-to-one mapping between discounting and altruism. JEL codes: D11, D64, D91, E21.