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Ricardian Equivalence Survives Strategic Behavior

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Abstract

Robert Barro (1974) showed government debt has no real effects when generations are linked by altruistically motivated intergenerational transfers, a result now known widely as the Ricardian Equivalence Theorem. An important condition for debt neutrality is believed to be the absence of strategic interactions between members of different generations. I use a simple two-period, parent and child model in which the parent is altruistic, to show Ricardian equivalence holds in the presence of intergenerational strategic behavior for a broad class of utility functions. The intuition for this result derives from the fact that the child’s utility is a public good.

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  • Rebelein, Robert, 2004. "Ricardian Equivalence Survives Strategic Behavior," Vassar College Department of Economics Working Paper Series 62, Vassar College Department of Economics.
    • Handle: RePEc:vas:papers:62
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    1. Barro, Robert J, 1989. "The Ricardian Approach to Budget Deficits," Journal of Economic Perspectives, American Economic Association, vol. 3(2), pages 37-54, Spring.
    2. Bruce, Neil & Waldman, Michael, 1991. "Transfers in Kind: Why They Can Be Efficient and Nonpaternalistic," American Economic Review, American Economic Association, vol. 81(5), pages 1345-1351, December.
    3. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
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    5. Kotlikoff, Laurence J & Razin, Assaf & Rosenthal, Robert W, 1990. "A Strategic Altruism Model in Which Ricardian Equivalence Does Not Hold," Economic Journal, Royal Economic Society, vol. 100(403), pages 1261-1268, December.
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    7. Neil Bruce & Michael Waldman, 1990. "The Rotten-Kid Theorem Meets the Samaritan's Dilemma," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 105(1), pages 155-165.
    8. Seater, John J, 1993. "Ricardian Equivalence," Journal of Economic Literature, American Economic Association, vol. 31(1), pages 142-190, March.
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    10. Lindbeck, Assar & Weibull, Jorgen W, 1988. "Altruism and Time Consistency: The Economics of Fait Accompli," Journal of Political Economy, University of Chicago Press, vol. 96(6), pages 1165-1182, December.
    11. Coate, Stephen, 1995. "Altruism, the Samaritan's Dilemma, and Government Transfer Policy," American Economic Review, American Economic Association, vol. 85(1), pages 46-57, March.
    12. Leonardo Leiderman & Mario I. Blejer, 1988. "Modeling and Testing Ricardian Equivalence: A Survey," IMF Staff Papers, Palgrave Macmillan, vol. 35(1), pages 1-35, March.
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    1. Robert P. Rebelein, 2006. "Strategic Behavior, Debt Neutrality, and Crowding Out," Public Finance Review, , vol. 34(2), pages 148-172, March.
    2. Rebelein, Robert P., 2005. "Intergenerational Strategic Behavior and Crowding Out in a General Equilibrium Model," Vassar College Department of Economics Working Paper Series 74, Vassar College Department of Economics.

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