Is Everything Neutral?

71 Pages Posted: 8 Jun 2004 Last revised: 15 Sep 2010

See all articles by B. Douglas Bernheim

B. Douglas Bernheim

Stanford University - Department of Economics; National Bureau of Economic Research (NBER)

Kyle Bagwell

Stanford University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: December 1986

Abstract

In his well-known analysis of the national debt, Robert Barro introduced the notion of a "dynastic family." This notion has since become a standard research tool, particularly in the areas of public finance and macroeconomics. In this paper, we critique the assumptions upon which the dynastic mode1 is predicated, and argue that this framework is not a suitable abstraction in contexts where the objective is to analyze the effects of public policies. We reach this conclusion by formally considering a world in which each generation consists of a large number of distinct individuals, as opposed to one representative individual. We point out that family linkages form complex networks, in which each individual may belong to many dynastic groupings. The resulting proliferation of linkages between families gives rise to a host of neutrality results, including the irrelevance of all public redistributions, distortionary taxes, and prices. Since these results are not at all descriptive of the real world, we conclude that, in some fundamental sense, the world is not even approximately dynastic. These observations call into question all policy related results based on the dynastic framework, including the Ricardian equivalence hypo thesis.

Suggested Citation

Bernheim, B. Douglas and Bagwell, Kyle, Is Everything Neutral? (December 1986). NBER Working Paper No. w2086. Available at SSRN: https://ssrn.com/abstract=344859

B. Douglas Bernheim (Contact Author)

Stanford University - Department of Economics ( email )

Landau Economics Building
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650-725-8732 (Phone)
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National Bureau of Economic Research (NBER)

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Kyle Bagwell

Stanford University - Department of Economics ( email )

Landau Economics Building
579 Serra Mall
Stanford, CA 94305-6072
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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