Resolving intertemporal conflicts: Economics vs. Politics


Intertemporal conflicts occur when a group of agents with heterogeneous time
preferences must make a collective decision about how to manage a common asset.
How should this be done? We examine two methods – an `Economics’ approach that
seeks to implement efficient allocations, and a `Politics’ approach in which agents vote
over consumption plans. We compare these methods by varying two characteristics of
the problem: are agents’ preferences known or are they hidden information, and can
they commit to intertemporal collective plans or not? We show that if commitment
is possible the Economics approach always Pareto dominates the Politics approach,
in both full and hidden information scenarios. By contrast, without commitment
the group may be better off if the Politics approach is adopted. We investigate
when Politics trumps Economics analytically, and then apply our model to a survey
of economists’ views on the appropriate pure rate of time preference for project
appraisal. For a wide range of model parameters, and under both full and hidden
information, the Politics approach is supported by a majority of agents, and leads to
higher group welfare.