Social patience, social credibility and long run inequality

This paper considers optimal social insurance in a dynamic moral hazard economy. The existing literature has focussed on environments in which a planner and a population agents share the same discount factor. A key finding is that agents are almost surely immiserated: their welfare is driven to its lowest bound. We show that this immiseration result does not hold when the planner’s discount factor exceeds the agents’. We give conditions under which optimal allocations in such settings imply a strongly ergodic invariant distribution over endogenously evolving agent Pareto-Negishi weights, agent utilities and consumptions. We consider the implications of this result for inequality and social mobility. Finally, we show that a high social discount factor arises endogenously in environments in which the planner is subject to credibility constraints that require it to maintain a weighted aggregate of agent utilites above a lower bound.