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

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  • David Altig
  • Steve J. Davis

Abstract

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.

Suggested Citation

  • David Altig & Steve J. Davis, 1991. "Borrowing Constraints and Two-Sided Altruism With an Application to Social Security," NBER Working Papers 3913, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:3913
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    1. repec:kap:iaecre:v:7:y:2001:i:4:p:479-504 is not listed on IDEAS
    2. repec:spr:joevec:v:27:y:2017:i:5:d:10.1007_s00191-017-0519-3 is not listed on IDEAS
    3. Yang, Zaigui, 2009. "Urban public pension, replacement rates and population growth rate in China," Insurance: Mathematics and Economics, Elsevier, vol. 45(2), pages 230-235, October.
    4. Arrondel, Luc & Masson, Andre, 2006. "Altruism, exchange or indirect reciprocity: what do the data on family transfers show?," Handbook on the Economics of Giving, Reciprocity and Altruism, Elsevier.
    5. Yih-chyi Chuang & Chen-Yeng Chao, 2001. "Educational choice, wage determination, and rates of return to education in Taiwan," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 7(4), pages 479-504, November.
    6. Luisa Fuster, 1999. "Is Altruism Important for Understanding the Long-Run Effects of Social Security?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(3), pages 616-637, July.
    7. 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 1199-1220, December.
    8. Aoki, Takaaki, 2008. "On the Implications of Two-way Altruism in Human-Capital-Based OLG Model," MPRA Paper 12492, University Library of Munich, Germany.
    9. Barczyk, Daniel, 2016. "Ricardian equivalence revisited: Deficits, gifts and bequests," Journal of Economic Dynamics and Control, Elsevier, vol. 63(C), pages 1-24.
    10. Yang, Fang, 2013. "Social security reform with impure intergenerational altruism," Journal of Economic Dynamics and Control, Elsevier, vol. 37(1), pages 52-67.
    11. Thierry Chauveau & Rahim Loufir, 1993. "Retraites et évolutions démographiques en France - Seconde partie : la transition," Revue de l'OFCE, Programme National Persée, vol. 47(1), pages 117-160.
    12. Aoki Takaaki, 2011. "On the Implications of Two-Sided Altruism in Human Capital Based OLG Model," Asian Journal of Law and Economics, De Gruyter, vol. 2(2), pages 1-40, July.
    13. Kunio Tsuyuhara, 2014. "A Welfare Analysis of Child Labor Restriction: Intergenerational Perspectives," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 39(3), pages 15-33, September.

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