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Borrowing Constraints, Parental Altruism and Welfare

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Author Info
Jorge Soares () (Department of Economics,University of Delaware)

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Abstract

This paper investigates the impact of borrowing constraints on welfare in a standard overlapping-generations model where parental altruism results in transfers. I find that the average level of welfare is higher when children cannot borrow against future income. As Bernheim (1989) showed, the Nash-Cournot equilibrium does not maximize the average level of utility of currently living agents; the presence of a borrowing constraint increases children's savings and parental transfers bringing their levels closer to the optimum, raising children's welfare as well as average welfare in the short-run and in the long-run. Additionally, borrowing constraints reduce investment on children's education, decreasing the aggregate level of human capital, but raises aggregate savings and, hence, physical capital. When prices are flexible, the latter effect dominates and the positive welfare impact of the credit constraint is higher.

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Publisher Info
Paper provided by University of Delaware, Department of Economics in its series Working Papers with number 08-12.

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Length: 39 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:dlw:wpaper:08-12.

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Postal: Purnell Hall, Newark, Delaware 19716
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Web page: http://www.lerner.udel.edu/departments/economics/
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Related research
Keywords: borrowing constraints; altruism; overlapping generations; welfare;

Find related papers by JEL classification:
D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving
E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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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. Jorge Soares, 2009. "Welfare Impact of a Ban on Child Labor," Working Papers 09-01., University of Delaware, Department of Economics. [Downloadable!]
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