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A Strategic Altruism Model In Which Ricardian Equivalence Does Not Hold

  • Laurence J. Kotlikoff
  • Assaf Razin
  • Robert W. Rosenthal

This article demonstrates that Ricardian Equivalence does not necessarily hold in models with altruistic transfers once one takes into account the strategic behavior of recipients as well as donors. To influence the final allocation of consumption in altruistic settings, potential recipients can threaten to refuse as well as accept transfers. We apply the Extended Nash Bargaining Solution to the problem of an altruistic parent and a possibly altruistic child. The parent and child first choose a threat point noncooperatively; this threat point then influences the final allocation of consumption through the standard Nash Bargaining Solution, While the potential recipient can refuse transfers from the potential donor, he cannot refuse transfers from the government. When the government redistributes between the parent and child, it changes their endowments and the equilibrium threats, and thus the final allocation of consumption. The feature of the cooperative model presented here that leads to the failure of Ricardian Equivalence may be characteristic of a wider class of cooperative and noncooperative altruism models. This feature is that noninterior strategic postures underlie interior transfer behavior and that these non- interior strategic postures are altered by government redistribution.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2699.

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Date of creation: Sep 1988
Date of revision:
Publication status: published as The Economic Journal, Vol. 100, pp. 1261-1268, (December 1990).
Handle: RePEc:nbr:nberwo:2699
Note: PE
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