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The Effects of Fiscal Policies when Incomes Are Uncertain: A Contradiction to Ricardian Equivalence

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Feldstein, Martin

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Abstract

This paper shows that, when future earnings are uncertain, the substitution of deficit fin ance for tax finance (or the introduction of an unfunded social secur ity program) can raise consumption even if all bequests reflect inter generational altruism. An operative bequest motive therefore need not imply Ricardian equivalence. This conclusion follows from the result , derived in the paper, that the uncertainty of future income makes t he existence of a future bequest uncertain to the prospective donor. Copyright 1988 by American Economic Association.

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Publisher Info
Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 78 (1988)
Issue (Month): 1 (March)
Pages: 14-23
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Handle: RePEc:aea:aecrev:v:78:y:1988:i:1:p:14-23

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Feldstein, Martin, 1982. "Government deficits and aggregate demand," Journal of Monetary Economics, Elsevier, vol. 9(1), pages 1-20. [Downloadable!] (restricted)
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  2. Barsky, Robert B & Mankiw, N Gregory & Zeldes, Stephen P, 1986. "Ricardian Consumers with Keynesian Propensities," American Economic Review, American Economic Association, vol. 76(4), pages 676-91, September. [Downloadable!] (restricted)
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  3. Laurence J. Kotlikoff & Lawrence H. Summers, 1981. "The Role of Intergenerational Transfers in Aggregate Capital Accumulation," NBER Working Papers 0445, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  4. Eckstein, Zvi & Eichenbaum, Martin S & Peled, Dan, 1985. "The Distribution of Wealth and Welfare in the Presence of Incomplete Annuity Markets," The Quarterly Journal of Economics, MIT Press, vol. 100(3), pages 789-806, August. [Downloadable!] (restricted)
  5. Kotlikoff, Laurence J & Spivak, Avia, 1981. "The Family as an Incomplete Annuities Market," Journal of Political Economy, University of Chicago Press, vol. 89(2), pages 372-91, April. [Downloadable!] (restricted)
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  6. B. Douglas Bernheim & Andrei Shleifer & Lawrence H. Summers, 1986. "Bequests as a Means of Payment," NBER Working Papers 1303, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Sandmo, Agnar, 1970. "The Effect of Uncertainty on Saving Decisions," Review of Economic Studies, Blackwell Publishing, vol. 37(3), pages 353-60, July. [Downloadable!] (restricted)
  8. Abel, Andrew B, 1985. "Precautionary Saving and Accidental Bequests," American Economic Review, American Economic Association, vol. 75(4), pages 777-91, September. [Downloadable!] (restricted)
  9. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec.. [Downloadable!] (restricted)
  10. O'Driscoll, Gerald P, Jr, 1977. "The Ricardian Nonequivalence Theorem," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 207-10, February. [Downloadable!] (restricted)
  11. Dreze, Jacques H. & Modigliani, Franco, 1972. "Consumption decisions under uncertainty," Journal of Economic Theory, Elsevier, vol. 5(3), pages 308-335, December. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Johanna Etner & Meglena Jeleva & Pierre-André Jouvet, 2004. "Risk Perceptions, Voluntary Contributions and Environmental Policy," Cahiers de la Maison des Sciences Economiques v04097, Université Panthéon-Sorbonne (Paris 1). [Downloadable!]
    Other versions:
  2. Heathcote, Jonathan, 1999. "Fiscal Policy with Heterogeneous Agents and Incomplete Markets," Working Paper Series in Economics and Finance 319, Stockholm School of Economics, revised 28 Jul 1999. [Downloadable!]
    Other versions:
  3. Joon-Ho Hahm, 1999. "Consumption Growth, Income Growth And Earnings Uncertainity: Simple Cross-Country Evidence," International Economic Journal, Korean International Economic Association, vol. 13(2), pages 39-58, June. [Downloadable!] (restricted)
  4. Gandenberger, Otto, 2000. "Is the Fiscal Deficit Misconceived? Proponents of Generational Accounting Overstate their Case," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  5. Jonathan Skinner & Stephen P. Zeldes, 2002. "The Importance of Bequests and Life-Cycle Saving in Capital Accumulation: A New Answer," American Economic Review, American Economic Association, vol. 92(2), pages 274-278, May. [Downloadable!]
  6. Canegrati, Emanuele, 2007. "On redistribution effects of public debt amongst single-minded generations," MPRA Paper 2254, University Library of Munich, Germany. [Downloadable!]
  7. Andrew B. Abel, 1987. "An Analysis of Fiscal Policy Under Operative and Inoperative Bequest Motives," NBER Working Papers 2298, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  8. Roberto Ricciuti & Davide Di Laurea, 2003. "An experimental analysis of two departures from Ricardian equivalence," Economics Bulletin, Economics Bulletin, vol. 8(11), pages 1-11. [Downloadable!]
  9. Willem H. Buiter & K.M. Kletzer, 1994. "Ponzi Finance, Government Solvency and the Redundancy or Usefulness of Public Debt," Cowles Foundation Discussion Papers 1070, Cowles Foundation, Yale University. [Downloadable!]
  10. Laurence J. Kotlikoff, 2001. "Generational Policy," NBER Working Papers 8163, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
    • Kotlikoff, Laurence J., 2002. "Generational policy," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 27, pages 1873-1932 Elsevier. [Downloadable!] (restricted)
  11. JOUVET, Pierre-AndrŽ, 1998. "Voluntary contributions with uncertainty: the environmental quality," CORE Discussion Papers 1998020, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE). [Downloadable!]
    Other versions:
  12. Walter Enders & Harvey Lapan, 1993. "A model of first and second-best social security programs," Journal of Economics, Springer, vol. 7(1), pages 65-90, December. [Downloadable!] (restricted)
    Other versions:
  13. Islam, Roumeen & Wetzel, Deborah L., 1991. "The macroeconomics of public sector deficits : the case of Ghana," Policy Research Working Paper Series 672, The World Bank. [Downloadable!]
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