An Analysis of Fiscal Policy Under Operative and Inoperative Bequest Motives

Abstract

This paper presents a general equilibrium model with logarithmic preferences and technology. If the non-negativity constraint on bequests is strictly binding, then the bequest motive is characterized as inoperative. After determining the conditions for operative and inoperative bequest motives, the paper examines the effect of pay- as- you-go social security on the stochastic evolution of the capital stock. If the non-negativity constraint on bequests is strictly binding, then an increase in social security reduces the unconditional long- run expected capital stock. If the social security taxes and benefits are large enough, then the non-negativity constraint ceases to bind, and further increases in social security have no effect. This paper extends previous analyses by examining bequest behavior outside of the steady state and by allowing a non-degenerate cross-sectional distribution in the holding of capital.