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Borrowing Constraints, Parental Altruism and Welfare

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Author Info

  • Jorge Soares

    ()
    (Department of Economics,University of Delaware)

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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File URL: http://graduate.lerner.udel.edu/sites/default/files/ECON/PDFs/RePEc/dlw/WorkingPapers/2008/UDWP2008-12.pdf
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Bibliographic 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
Phone: (302) 831-2565
Fax: (302) 831-6968
Web page: http://www.lerner.udel.edu/departments/economics/department-economics/
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Related research

Keywords: borrowing constraints; altruism; overlapping generations; welfare;

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References

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Citations

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Cited by:
  1. Nicole Simpson & Felicia Ionescu, 2010. "Credit Scores and College Investment," 2010 Meeting Papers 666, Society for Economic Dynamics.
  2. Jorge Soares, 2009. "Welfare Impact of a Ban on Child Labor," Working Papers 08-01, University of Delaware, Department of Economics.

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