Ricardian Equivalence with Incomplete Household Risk Sharing

24 Pages Posted: 28 Mar 2002 Last revised: 27 Oct 2010

See all articles by Shinichi Nishiyama

Shinichi Nishiyama

Congressional Budget Office

Kent A. Smetters

University of Pennsylvania - Business & Public Policy Department; National Bureau of Economic Research (NBER)

Date Written: March 2002

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

Nishiyama, Shinichi and Smetters, Kent, Ricardian Equivalence with Incomplete Household Risk Sharing (March 2002). NBER Working Paper No. w8851, Available at SSRN: https://ssrn.com/abstract=305077

Shinichi Nishiyama

Congressional Budget Office ( email )

Ford House Office Building
2nd & D Streets, SW
Washington, DC 20515-6925
United States

Kent Smetters (Contact Author)

University of Pennsylvania - Business & Public Policy Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6372
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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