In this paper, we examine various aspects of the optimal lifetime
redistribution policy within a cohort. We characterize
the optimal tax policy when society consists of individuals
who do not differ only in productivity, but also in time preference.
We extend Diamond’s analysis on nonlinear taxation
of savings into the three-type and four-type models. To gain a
better understanding of the lifetime redistribution, the problem
is also solved numerically. Our results provide a rationale
for distortions (upward and downward) in savings behavior
in a simple two-period model where high-skilled and lowskilled
individuals have different nonobservable time preferences
beyond their earning capacity. If we interpret our
model so that instead of private savings there is public provision
of pension in the second period, then in the threetype
model, we find a nonmonotonic pattern of the replacement
rates. The numerical results suggest that retirement
consumption is less dispersed than the first-period consumption
in a paternalistic case. Paternalistic government policy
also increases second-period consumption compared to the
welfarist case.
Sanna