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Familial Love and Intertemporal Optimality

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  • Herschel I. Grossman

Abstract

This paper analyzes the intertemporal efficiency and optimality of steady states within overlapping-generations models in which the utility of individual working couples , depends on the consumption of their parents and children as well as their own consumption. The analysis considers both a basic model in which altruistic behavior can take only the form of gifts of consumption goods from working couples to their retired parents and an extended model in which altruistic behavior also can take the form of bequests from parents to their surviving children. In the basic model, saving only involves storing consumption goods, whereas the extended model includes capital and neoclassical production. The following conclusions from the analysis apply to both models: An altruistic utility function promotes inter-temporal efficiency. However, altruism creates an externality that implies that satisfying the conditions for efficiency does not insure intertemporal optimality. Nevertheless, if the utility of working couples is appropriately sensitive at the margin to their own consumption, their parents consumption, and their children's consumption, the steady state that is consistent with individual behavior is both efficient and optimal.

Suggested Citation

  • Herschel I. Grossman, 1981. "Familial Love and Intertemporal Optimality," NBER Working Papers 0695, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:0695
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    1. 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..
    2. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, vol. 66, pages 467-467.
    3. 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.
    4. Drazen, Allan, 1978. "Government Debt, Human Capital, and Bequests in a Life-Cycle Model," Journal of Political Economy, University of Chicago Press, vol. 86(3), pages 505-516, June.
    5. Robert J. Willis, 1979. "The Old Age Security Hypothesis and Population Growth," NBER Working Papers 0372, National Bureau of Economic Research, Inc.
    6. David Cass & Menahem E. Yaari, 1966. "A Re-examination of the Pure Consumption Loans Model," Journal of Political Economy, University of Chicago Press, vol. 74, pages 353-353.
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