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Ricardian Equivalence with Incomplete Household Risk Sharing

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  • Shinichi Nishiyama
  • Kent Smetters

Abstract

Several important empirical studies (e.g., Altonji, Hayashi, and Kotlikoff, 1992, 1996, 1997) find that households are not altruistically-linked in a way consistent with the standard Ricardian model, as put forward by Barro (1974). We build a two-sided altruistic-linkage model in which private transfers are made in the presence of two types of shocks: an 'observable' shock that is public information (e.g., public redistribution) and an 'unobservable' shock that is private information (e.g., idiosyncratic wages). Parents and children observe each other's total income but not each other's effort level. In the second-best optimum, unobservable shocks are only partially shared whereas, for any utility function satisfying a condition derived herein, observable shocks are fully shared. The model, therefore, can generate the low degree of risk sharing found in the recent studies, but Ricardian equivalence still holds.

Suggested Citation

  • Shinichi Nishiyama & Kent Smetters, 2002. "Ricardian Equivalence with Incomplete Household Risk Sharing," NBER Working Papers 8851, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:8851
    Note: AG PE
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    Cited by:

    1. repec:red:issued:14-279 is not listed on IDEAS
    2. Ernesto Villanueva, 2001. "Parental altruism under imperfect information: Theory and evidence," Economics Working Papers 566, Department of Economics and Business, Universitat Pompeu Fabra, revised Sep 2002.
    3. Shinichi Nishiyama, 2002. "Bequests, Inter Vivos Transfers, and Wealth Distribution," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 5(4), pages 892-931, October.

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    JEL classification:

    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents

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