Time Consistent Optimal Redistribution Policy in an Overlapping Generations Model

Abstract This paper analyzes optimal redistribution policy in a two‐period version of the overlapping generations model with heterogeneous individuals and asymmetric information between the government and the private sector. The government of the first period determines redistribution transfers for the first period but is not able to set the policy variables for the second period. With respect to savings the paper considers two scenarios: In the first scenario savings are observable and the government can set individual savings levels in addition to redistributive transfers. In the second scenario savings and capital incomes are not observable. In both cases the redistribution equilibrium is not second‐best efficient.