COSTLY TRANSFER INSTITUTIONS AND THE CORE IN AN OVERLAPPING GENERATIONS MODEL

We examine an overlapping generations economy with no pre-existing int ergenerational transfers and study the set of transfer institutions in the core of the economy, that is, institutions that would be admissib le for the first generation to create and would not be rejected by any future generation. Institution-building is assumed to be costly, We a llow the cost of creating a new institution to vary with the size of t he transfer it institutes and show that all institutions in the core m ust cost as much to build as they transfer. In fact, the core set is n onempty if and only if the institution that supports the golden-rule t ransfer costs as much to create as it transfers. The core set is chara cterized for various cost functions. We conclude that costs associated with the creation of transfer institutions are essential to make inte rgenerational transfers socially viable, but they may induce the choic e of institutions making suboptimal transfers.