Fiscal Policy with Impure Intergenerational Altruism

71 Pages Posted: 3 May 2004 Last revised: 24 Aug 2010

See all articles by Andrew B. Abel

Andrew B. Abel

University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER)

B. Douglas Bernheim

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

Date Written: June 1988

Abstract

Recent work demonstrates that dynastic assumptions guarantee the irrelevance of all redistributional polices, distortionary taxes, and prices--the neutrality of fiscal policy (Ricardian equivalence) is only the "tip of the iceberg." In this paper, we investigate the possibility of reinstating approximate Ricardian equivalence. by introducing a small amount of friction in intergenerational links. If Ricardian equivalence depends upon significantly shorter chains of links than do these stronger neutrality results, then friction my dissipate the effects that generate strong neutrality, without significantly affecting the Ricardian result. Although this intuition turns out to be essentially correct, we show that models with small amounts of friction have other untenable implications. We conclude that the theoretical case for Ricardian equivalence remains tenuous.

Suggested Citation

Abel, Andrew B. and Bernheim, B. Douglas, Fiscal Policy with Impure Intergenerational Altruism (June 1988). NBER Working Paper No. w2613. Available at SSRN: https://ssrn.com/abstract=428356

Andrew B. Abel (Contact Author)

University of Pennsylvania - Finance Department ( email )

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B. Douglas Bernheim

Stanford University - Department of Economics ( email )

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650-725-5702 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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