Like Father, Like Son: Inheriting and Bequeathing

This paper incorporates indirect reciprocal behavior in the context of bequeathing decisions into an otherwise standard OLG model. We provide conditions for the existence of a unique steady state with operative bequests. Contrary to standard OLG models, we show that taking into account such behavioral interactions allows one to rationalize both an increasing and U‐shaped pattern of the inheritance to GDP ratio over time, consistent with recent empirical evidence. Moreover, the model predicts a nonlinear (U‐shaped) relationship between the size of an unfunded social security program and the long‐run stock of per capita capital, which in turn provides a novel explanation of the inconclusive empirical findings on the relationship between social security, savings and long‐run growth. Ricardian equivalence is shown to hold in a special case of the model