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

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  • Feldstein, Martin

Abstract

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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  • Feldstein, Martin, 1988. "The Effects of Fiscal Policies when Incomes Are Uncertain: A Contradiction to Ricardian Equivalence," American Economic Review, American Economic Association, vol. 78(1), pages 14-23, March.
  • Handle: RePEc:aea:aecrev:v:78:y:1988:i:1:p:14-23
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    1. 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 372-391, April.
    2. Feldstein, Martin, 1982. "Government deficits and aggregate demand," Journal of Monetary Economics, Elsevier, vol. 9(1), pages 1-20.
    3. 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 706-732, August.
    4. 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..
    5. 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.
    6. Dreze, Jacques H. & Modigliani, Franco, 1972. "Consumption decisions under uncertainty," Journal of Economic Theory, Elsevier, vol. 5(3), pages 308-335, December.
    7. O'Driscoll, Gerald P, Jr, 1977. "The Ricardian Nonequivalence Theorem," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 207-210, February.
    8. Barsky, Robert B & Mankiw, N Gregory & Zeldes, Stephen P, 1986. "Ricardian Consumers with Keynesian Propensities," American Economic Review, American Economic Association, vol. 76(4), pages 676-691, September.
    9. Zvi Eckstein & Martin S. Eichenbaum & Dan Peled, 1985. "The Distribution of Wealth and Welfare in the Presence of Incomplete Annuity Markets," The Quarterly Journal of Economics, Oxford University Press, vol. 100(3), pages 789-806.
    10. 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.
    11. Abel, Andrew B, 1985. "Precautionary Saving and Accidental Bequests," American Economic Review, American Economic Association, vol. 75(4), pages 777-791, September.
    12. A. Sandmo, 1970. "The Effect of Uncertainty on Saving Decisions," Review of Economic Studies, Oxford University Press, vol. 37(3), pages 353-360.
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