Only one of two equilibrium possibilities arise in standard overlapping generation models with dynastic preferences: either the altruistic bequest motive is operative for every generation (in which case, Ricardian equivalence obtains) or it is not, for any generation. This paper introduces cross-generational consumption externalities into a AK model with overlapping generations. It is shown that the model economy does not support a steady-state equilibrium in which inheritances are received and bequests left at every date; hence Ricardian equivalence fails. There does exist, however, out-of-steady state equilibria in which the bequest motive is occasionally operative; i.e., there are `deviant' generations that do not leave a bequest even though they received an inheritance, and vice versa. This is in line with commonly-held beliefs in the United States that the World War II generation is `generous' while the baby boomer generation is `stingy' and out to `spend their kids' inheritance'. The cross-generational consumption externalities are also capable of generating endogenous growth cycles that did not exist otherwise.
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Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number
12939.
Length: Date of creation: 19 May 2008 Date of revision: Handle: RePEc:isu:genres:12939
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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.:
Kiminori Matsuyama, 1996.
"Growing Through Cycles,"
Discussion Papers
1203, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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