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Borrowing Constraints, Parental Altruism and Welfare

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  • Jorge Soares

    () (Department of Economics,University of Delaware)

Abstract

This paper investigates the impact of borrowing constraints on welfare in a standard overlapping-generations model where parental altruism results in transfers. I find that the average level of welfare is higher when children cannot borrow against future income. As Bernheim (1989) showed, the Nash-Cournot equilibrium does not maximize the average level of utility of currently living agents; the presence of a borrowing constraint increases children's savings and parental transfers bringing their levels closer to the optimum, raising children's welfare as well as average welfare in the short-run and in the long-run. Additionally, borrowing constraints reduce investment on children's education, decreasing the aggregate level of human capital, but raises aggregate savings and, hence, physical capital. When prices are flexible, the latter effect dominates and the positive welfare impact of the credit constraint is higher.

Suggested Citation

  • Jorge Soares, 2008. "Borrowing Constraints, Parental Altruism and Welfare," Working Papers 08-12, University of Delaware, Department of Economics.
  • Handle: RePEc:dlw:wpaper:08-12.
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Soares, Jorge, 2015. "Borrowing constraints, parental altruism and welfare," Journal of Macroeconomics, Elsevier, vol. 45(C), pages 1-20.
    2. Jorge Soares, 2010. "Welfare Impact Of A Ban On Child Labor," Economic Inquiry, Western Economic Association International, vol. 48(4), pages 1048-1064, October.
    3. Ionescu, Felicia & Simpson, Nicole, 2010. "Credit Scores and College Investment," Working Papers 2010-07, Department of Economics, Colgate University.
    4. Lesly Cassin, 2018. "The effects of migration and pollution externality on cognitive skills in Caribbean economies: a Theoretical analysis," EconomiX Working Papers 2018-30, University of Paris Nanterre, EconomiX.

    More about this item

    Keywords

    borrowing constraints; altruism; overlapping generations; welfare;

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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