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Borrowing Constraints and Two-Sided Altruism With an Application to Social Security

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  • David Altig
  • Steve J. Davis

Abstract

We develop the implications of borrowing constraints and two-sided altruism in an overlapping generations framework with agents who live three periods. Our analysis identifies six equilibrium patterns of intertemporal and intergenerational linkages in the no-loan economy, one of which corresponds to the traditional lifecycle model, and one of which corresponds to Barro's dynastic model. Novel linkage patterns involve parent-to-child transfers early in the life cycle, child-to-parent gifts late in the life cycle, or both. Capital accumulation behavior and the consequences of fiscal policy interventions depend, often critically, on which linkage patterns prevails. We show how unfunded social security interventions can significantly depress aggregate capital accumulation, even when every generation is linked to its successor generation by altruistic transfers. We also derive a non-Ricardian neutrality result for gift-motive economies that holds whether or not borrowing constraints bind and whether or not parent and child are connected by an operative altruism motive at all points in the life cycle.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3913.

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Date of creation: Nov 1991
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Publication status: published as Journal of Economic Dynamics and Control, 17 (1993), pp. 467-494
Handle: RePEc:nbr:nberwo:3913

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  1. Kimball, Miles S., 1987. "Making sense of two-sided altruism," Journal of Monetary Economics, Elsevier, Elsevier, vol. 20(2), pages 301-326, September.
  2. Cox, Donald, 1990. "Intergenerational Transfers and Liquidity Constraints," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 105(1), pages 187-217, February.
  3. Jappelli, Tullio, 1990. "Who Is Credit Constrained in the U.S. Economy?," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 105(1), pages 219-34, February.
  4. Neil Bruce & Michael Waldman, 1986. "The Rotten-Kid Theorem Meets the Samaritan's Dilemma," Working Papers, Queen's University, Department of Economics 650, Queen's University, Department of Economics.
  5. Guiso, Luigi & Jappelli, Tullio, 1991. "Intergenerational transfers and capital market imperfections : Evidence from a cross-section of Italian households," European Economic Review, Elsevier, Elsevier, vol. 35(1), pages 103-120, January.
  6. Gary S. Becker, 1974. "A Theory of Social Interactions," NBER Working Papers, National Bureau of Economic Research, Inc 0042, National Bureau of Economic Research, Inc.
  7. Zeldes, Stephen P, 1989. "Consumption and Liquidity Constraints: An Empirical Investigation," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 97(2), pages 305-46, April.
  8. Donald Cox & Fredric Raines, 1985. "Interfamily Transfers and Income Redistribution," NBER Chapters, National Bureau of Economic Research, Inc, in: Horizontal Equity, Uncertainty, and Economic Well-Being, pages 393-426 National Bureau of Economic Research, Inc.
  9. Feldstein, Martin S, 1974. "Social Security, Induced Retirement, and Aggregate Capital Accumulation," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 82(5), pages 905-26, Sept./Oct.
  10. David Altig & Steve J. Davis, 1989. "The timing of intergenerational transfers, tax policy, and aggregate savings," Working Paper, Federal Reserve Bank of Cleveland 8917, Federal Reserve Bank of Cleveland.
  11. B. Douglas Bernheim & Kyle Bagwell, 1989. "Is Everything Neutral?," NBER Working Papers, National Bureau of Economic Research, Inc 2086, National Bureau of Economic Research, Inc.
  12. Laurence J. Kotlikoff & Assaf Razin & Robert W. Rosenthal, 1988. "A Strategic Altruism Model In Which Ricardian Equivalence Does Not Hold," NBER Working Papers, National Bureau of Economic Research, Inc 2699, National Bureau of Economic Research, Inc.
  13. Barro, Robert J., 1974. "Are Government Bonds Net Wealth?," Scholarly Articles, Harvard University Department of Economics 3451399, Harvard University Department of Economics.
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Cited by:
  1. Luisa Fuster, 1999. "Is Altruism Important for Understanding the Long-Run Effects of Social Security?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(3), pages 616-637, July.
  2. Yang, Zaigui, 2009. "Urban public pension, replacement rates and population growth rate in China," Insurance: Mathematics and Economics, Elsevier, Elsevier, vol. 45(2), pages 230-235, October.
  3. Fang Yang, 2012. "Social Security Reform with Impure Intergenerational Altruism," Discussion Papers, University at Albany, SUNY, Department of Economics 12-01, University at Albany, SUNY, Department of Economics.
  4. Daniel Barczyk, 2013. "Deficits, Gifts, and Bequests," 2013 Meeting Papers, Society for Economic Dynamics 25, Society for Economic Dynamics.
  5. David Altig & Steve J. Davis, 1989. "The timing of intergenerational transfers, tax policy, and aggregate savings," Working Paper, Federal Reserve Bank of Cleveland 8917, Federal Reserve Bank of Cleveland.
  6. Aoki, Takaaki, 2008. "On the Implications of Two-way Altruism in Human-Capital-Based OLG Model," MPRA Paper, University Library of Munich, Germany 12492, University Library of Munich, Germany.

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