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The Effects of Fiscal Policies when Incomes Are Uncertain: A Contradiction to Ricardian Equivalence

  • Feldstein, Martin

This paper shows that, when future earnings are uncertain, the substitution of deficit fin ance for tax finance (or the introduction of an unfunded social secur ity program) can raise consumption even if all bequests reflect inter generational altruism. An operative bequest motive therefore need not imply Ricardian equivalence. This conclusion follows from the result , derived in the paper, that the uncertainty of future income makes t he existence of a future bequest uncertain to the prospective donor. Copyright 1988 by American Economic Association.

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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 78 (1988)
Issue (Month): 1 (March)
Pages: 14-23

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Handle: RePEc:aea:aecrev:v:78:y:1988:i:1:p:14-23
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  1. Abel, Andrew B, 1985. "Precautionary Saving and Accidental Bequests," American Economic Review, American Economic Association, vol. 75(4), pages 777-91, September.
  2. Kotlikoff, Laurence J & Spivak, Avia, 1981. "The Family as an Incomplete Annuities Market," Journal of Political Economy, University of Chicago Press, vol. 89(2), pages 372-91, April.
  3. Eckstein, Zvi & Eichenbaum, Martin S & Peled, Dan, 1985. "The Distribution of Wealth and Welfare in the Presence of Incomplete Annuity Markets," The Quarterly Journal of Economics, MIT Press, vol. 100(3), pages 789-806, August.
  4. Feldstein, Martin, 1982. "Government deficits and aggregate demand," Journal of Monetary Economics, Elsevier, vol. 9(1), pages 1-20.
  5. B. Douglas Bernheim & Andrei Shleifer & Lawrence H. Summers, 1984. "Bequests as a Means of Payment," NBER Working Papers 1303, National Bureau of Economic Research, Inc.
  6. Kotlikoff, Laurence J & Summers, Lawrence H, 1981. "The Role of Intergenerational Transfers in Aggregate Capital Accumulation," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 706-32, August.
  7. Robert B. Barsky & N. Gregory Mankiw & Stephen P. Zeldes, 1984. "Ricardian Consumers With Keynesian Propensities," NBER Working Papers 1400, National Bureau of Economic Research, Inc.
  8. Barro, Robert J., 1974. "Are Government Bonds Net Wealth?," Scholarly Articles 3451399, Harvard University Department of Economics.
  9. O'Driscoll, Gerald P, Jr, 1977. "The Ricardian Nonequivalence Theorem," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 207-10, February.
  10. Sandmo, Agnar, 1970. "The Effect of Uncertainty on Saving Decisions," Review of Economic Studies, Wiley Blackwell, vol. 37(3), pages 353-60, July.
  11. Benjamin M. Friedman & Mark Warshawsky, 1985. "The Cost of Annuities: Implications for Saving Behavior and Bequests," NBER Working Papers 1682, National Bureau of Economic Research, Inc.
  12. Dreze, Jacques H. & Modigliani, Franco, 1972. "Consumption decisions under uncertainty," Journal of Economic Theory, Elsevier, vol. 5(3), pages 308-335, December.
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