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Dynamic Efficiency in the Gifts Economy

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  • Stephen A. O'Connell
  • Stephen P. Zeldes

Abstract

In the standard analysis of an overlapping generations economy with gifts from children to parents, each generation takes the actions of all other generations as given. The resulting "simultaneous moves" equilibrium is dynamically inefficient. In reality, however, parents precede children in time and realize that children will respond to higher parental saving by reducing their gifts. Incorporating this feature lowers the effective return to saving, resulting in lower steady state capital accumulation. For a broad class of gift economies, we show that the steady state capital stock in the gifts model must be on the efficient side of the golden rule. The analysis therefore overturns the standard presumption of dynamic inefficiency in the gift economy. This result reestablishes the potential relevance of the gift model to the U.S. economy, renders moot an important part of the debate on Ricardian Equivalence, extends the recent literature on the effects of implicit taxation on capital accumulation, and provides a motivation for the presence of a Social Security type system that unconditionally transfers resources from young to old.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4318.

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Date of creation: May 1994
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Handle: RePEc:nbr:nberwo:4318

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  1. Abel, Andrew B, 1987. "Operative Gift and Bequest Motives," American Economic Review, American Economic Association, vol. 77(5), pages 1037-47, December.
  2. Feldstein, Martin, 1995. "College Scholarship Rules and Private Saving," American Economic Review, American Economic Association, vol. 85(3), pages 552-66, June.
  3. Stephen A. O'Connell & Stephen P. Zeldes, . "Ponzi Games and Ricardian Equivalence," Rodney L. White Center for Financial Research Working Papers 12-87, Wharton School Rodney L. White Center for Financial Research.
  4. Bruce, Neil & Waldman, Michael, 1990. "The Rotten-Kid Theorem Meets the Samaritan's Dilemma," The Quarterly Journal of Economics, MIT Press, vol. 105(1), pages 155-65, February.
  5. Feldstein, Martin & Liebman, Jeffrey B., 2002. "Social security," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 32, pages 2245-2324 Elsevier.
  6. Glenn R. Hubbard & Jonathan Skinner & Stephen P. Zeldes, . "Precautionary Saving and Social Insurance," Rodney L. White Center for Financial Research Working Papers 3-95, Wharton School Rodney L. White Center for Financial Research.
  7. Kimball, Miles S., 1987. "Making sense of two-sided altruism," Journal of Monetary Economics, Elsevier, vol. 20(2), pages 301-326, September.
  8. L. Wade, 1988. "Review," Public Choice, Springer, vol. 58(1), pages 99-100, July.
  9. Hansson, Ingemar & Stuart, Charles, 1989. "Social Security as Trade among Living Generations," American Economic Review, American Economic Association, vol. 79(5), pages 1182-95, December.
  10. Carmichael, Jeffrey, 1982. "On Barro's Theorem of Debt Neutrality: The Irrelevance of Net Wealth," American Economic Review, American Economic Association, vol. 72(1), pages 202-13, March.
  11. O'Connell, Stephen A & Zeldes, Stephen P, 1988. "Rational Ponzi Games," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(3), pages 431-50, August.
  12. Weil, Philippe, 1987. "Love thy children : Reflections on the Barro debt neutrality theorem," Journal of Monetary Economics, Elsevier, vol. 19(3), pages 377-391, May.
  13. Veall, Michael R., 1986. "Public pensions as optimal social contracts," Journal of Public Economics, Elsevier, vol. 31(2), pages 237-251, November.
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