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Ricardian Equivalence with Incomplete Household Risk Sharing: Technical Paper 2002-4

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  • Shinichi Nishiyama
  • Kent Smetters

Abstract

Several important empirical studies (for example, Altonji, Hayashi, and Kotlikoff, 1992, 1996, 1997) have found that households are not altruistically linked in a way consistent with the standard Ricardian model, as put forward by Barro (1974). We built a two-sided altruistic-linkage model in which private transfers are made in the presence of two types of shocks: an observable shock that is public information (for example, public redistribution) and an unobservable shock that is private information (for example, idiosyncratic wages). Parents and children observe each other s total income but not each other's effort level. In the second-best solution, unobservable shocks are only partially shared, whereas, for any utility function satisfying a condition derived herein, observable shocks are fully shared. The model, therefore, can generate the low degree of risk sharing found in the recent studies, but Ricardian equivalence still holds.

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Bibliographic Info

Paper provided by Congressional Budget Office in its series Working Papers with number 14222.

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Date of creation: 02 Nov 2002
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Handle: RePEc:cbo:wpaper:14222

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  1. Barro, Robert J., 1974. "Are Government Bonds Net Wealth?," Scholarly Articles 3451399, Harvard University Department of Economics.
  2. Joseph G. Altonji & Fumio Hayashi & Laurence Kotlikoff, . "Parental Altruism and Inter Vivos Transfers: Theory and Evidence," IPR working papers 95-22, Institute for Policy Resarch at Northwestern University.
  3. Smetters, Kent, 1999. "Ricardian equivalence: long-run Leviathan," Journal of Public Economics, Elsevier, vol. 73(3), pages 395-421, September.
  4. Wilhelm, Mark O, 1996. "Bequest Behavior and the Effect of Heirs' Earnings: Testing the Altruistic Model of Bequests," American Economic Review, American Economic Association, vol. 86(4), pages 874-92, September.
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  8. Joseph G. Altonji & Fumio Hayashi & Laurence J. Kotlikoff, 1993. "Is the Extended Family Altruistically Linked? Direct Tests Using Micro Data," NBER Working Papers 3046, National Bureau of Economic Research, Inc.
  9. Townsend, R.M., 1991. "Risk and Insurance in Village India," University of Chicago - Economics Research Center 91-3, Chicago - Economics Research Center.
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  13. Tomes, Nigel, 1981. "The Family, Inheritance, and the Intergenerational Transmission of Inequality," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 928-58, October.
  14. Donald Cox & Bruce E. Hansen & Emmanuel Jimenez, 1997. "How Responsive are Private Transfers to Income? Evidence from a Laissez-Faire Economy," Boston College Working Papers in Economics 341., Boston College Department of Economics, revised 01 Dec 1999.
  15. Slemrod, Joel, 1995. "Professional Opinions About Tax Policy: 1994 and 1934," National Tax Journal, National Tax Association, vol. 48(1), pages 121-47, March.
  16. Evans, Paul, 1987. "Interest Rates and Expected Future Budget Deficits in the United States," Journal of Political Economy, University of Chicago Press, vol. 95(1), pages 34-58, February.
  17. Cardia, Emanuela, 1997. "Replicating Ricardian Equivalence Tests with Simulated Series," American Economic Review, American Economic Association, vol. 87(1), pages 65-79, March.
  18. Bernheim, B Douglas, 1991. "How Strong Are Bequest Motives? Evidence Based on Estimates of the Demand for Life Insurance and Annuities," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 899-927, October.
  19. Seater, John J, 1993. "Ricardian Equivalence," Journal of Economic Literature, American Economic Association, vol. 31(1), pages 142-90, March.
  20. Hayashi, Fumio & Altonji, Joseph & Kotlikoff, Laurence, 1996. "Risk-Sharing between and within Families," Econometrica, Econometric Society, vol. 64(2), pages 261-94, March.
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