Costly transfer institutions and the core in an overlapping generations model

We examine an overlapping generations economy with no pre-existing intergenerational transfers and study the set of transfer institutions in the core of the economy, that is, institutions that would be admissible for the first generation to create and would not be rejected by any future generation. Institution-building is assumed to be costly. We allow the cost of creating a new institution to vary with the size of the transfer it institutes and show that all institutions in the core must cost as much to build as they transfer. In fact, the core set is nonempty if and only if the institution that supports the golden-rule transfer costs as much to create as it transfers. The core set is characterized for various cost functions. We conclude that costs associated with the creation of transfer institutions are essential to make intergenerational transfers socially viable, but they may induce the choice of institutions making suboptimal transfers.