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Borrowing Constraints and Two-Sided Altruism With an Application to Social Security

  • David Altig
  • Steve J. Davis

We develop the implications of borrowing constraints and two-sided altruism in an overlapping generations framework with agents who live three periods. Our analysis identifies six equilibrium patterns of intertemporal and intergenerational linkages in the no-loan economy, one of which corresponds to the traditional lifecycle model, and one of which corresponds to Barro's dynastic model. Novel linkage patterns involve parent-to-child transfers early in the life cycle, child-to-parent gifts late in the life cycle, or both. Capital accumulation behavior and the consequences of fiscal policy interventions depend, often critically, on which linkage patterns prevails. We show how unfunded social security interventions can significantly depress aggregate capital accumulation, even when every generation is linked to its successor generation by altruistic transfers. We also derive a non-Ricardian neutrality result for gift-motive economies that holds whether or not borrowing constraints bind and whether or not parent and child are connected by an operative altruism motive at all points in the life cycle.

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File URL: http://www.nber.org/papers/w3913.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3913.

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Date of creation: Nov 1991
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Publication status: published as Journal of Economic Dynamics and Control, 17 (1993), pp. 467-494
Handle: RePEc:nbr:nberwo:3913
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  1. Donald Cox & Fredric Raines, 1985. "Interfamily Transfers and Income Redistribution," NBER Chapters, in: Horizontal Equity, Uncertainty, and Economic Well-Being, pages 393-426 National Bureau of Economic Research, Inc.
  2. Lindbeck, Assar & Weibull, Jorgen W, 1988. "Altruism and Time Consistency: The Economics of Fait Accompli," Journal of Political Economy, University of Chicago Press, vol. 96(6), pages 1165-82, December.
  3. Becker, Gary S, 1974. "A Theory of Social Interactions," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1063-93, Nov.-Dec..
  4. Cox, Donald, 1990. "Intergenerational Transfers and Liquidity Constraints," The Quarterly Journal of Economics, MIT Press, vol. 105(1), pages 187-217, February.
  5. Kimball, Miles S., 1987. "Making sense of two-sided altruism," Journal of Monetary Economics, Elsevier, vol. 20(2), pages 301-326, September.
  6. Kotlikoff, Laurence J & Razin, Assaf & Rosenthal, Robert W, 1990. "A Strategic Altruism Model in Which Ricardian Equivalence Does Not Hold," Economic Journal, Royal Economic Society, vol. 100(403), pages 1261-68, December.
  7. Jappelli, Tullio, 1990. "Who Is Credit Constrained in the U.S. Economy?," The Quarterly Journal of Economics, MIT Press, vol. 105(1), pages 219-34, February.
  8. Bruce, Neil & Waldman, Michael, 1990. "The Rotten-Kid Theorem Meets the Samaritan's Dilemma," The Quarterly Journal of Economics, MIT Press, vol. 105(1), pages 155-65, February.
  9. Altig, David & Davis, Steven J, 1992. "The Timing of Intergenerational Transfers, Tax Policy, and Aggregate Savings," American Economic Review, American Economic Association, vol. 82(5), pages 1199-220, December.
  10. Bernheim, B Douglas & Bagwell, Kyle, 1988. "Is Everything Neutral?," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 308-38, April.
  11. Guiso, Luigi & Jappelli, Tullio, 1991. "Intergenerational transfers and capital market imperfections : Evidence from a cross-section of Italian households," European Economic Review, Elsevier, vol. 35(1), pages 103-120, January.
  12. Feldstein, Martin S, 1974. "Social Security, Induced Retirement, and Aggregate Capital Accumulation," Journal of Political Economy, University of Chicago Press, vol. 82(5), pages 905-26, Sept./Oct.
  13. Stephen P. Zeldes, . "Consumption and Liquidity Constraints: An Empirical Investigation," Rodney L. White Center for Financial Research Working Papers 16-88, Wharton School Rodney L. White Center for Financial Research.
  14. Barro, Robert J., 1974. "Are Government Bonds Net Wealth?," Scholarly Articles 3451399, Harvard University Department of Economics.
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