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Ricardian Equivalence with Incomplete Household Risk Sharing

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  • Shinichi Nishiyama
  • Kent Smetters

Abstract

Several important empirical studies (e.g., Altonji, Hayashi, and Kotlikoff, 1992, 1996, 1997) find that households are not altruistically-linked in a way consistent with the standard Ricardian model, as put forward by Barro (1974). We build a two-sided altruistic-linkage model in which private transfers are made in the presence of two types of shocks: an 'observable' shock that is public information (e.g., public redistribution) and an 'unobservable' shock that is private information (e.g., idiosyncratic wages). Parents and children observe each other's total income but not each other's effort level. In the second-best optimum, unobservable shocks are only partially shared whereas, for any utility function satisfying a condition derived herein, observable shocks are fully shared. The model, therefore, can generate the low degree of risk sharing found in the recent studies, but Ricardian equivalence still holds.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8851.

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Date of creation: Mar 2002
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Handle: RePEc:nbr:nberwo:8851

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Cited by:
  1. Ernesto Villanueva, 2003. "Parental altruism under imperfect information: theory and evidence," Working Papers 19, Barcelona Graduate School of Economics.
  2. Shinichi Nishiyama, 2002. "Bequests, Inter Vivos Transfers, and Wealth Distribution," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 5(4), pages 892-931, October.

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