A Strategic Altruism Model in Which Ricardian Equivalence Does Not Hold

19 Pages Posted: 9 Mar 2004 Last revised: 22 May 2008

See all articles by Laurence J. Kotlikoff

Laurence J. Kotlikoff

Boston University - Department of Economics; National Bureau of Economic Research (NBER); Gaidar Institute for Economic Policy

Assaf Razin

Tel Aviv University - Eitan Berglas School of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Robert W. Rosenthal

Boston University, Department of Economics

Date Written: September 1988

Abstract

This article demonstrates that Ricardian Equivalence does not necessarily hold in models with altruistic transfers once one takes into account the strategic behavior of recipients as well as donors. To influence the final allocation of consumption in altruistic settings, potential recipients can threaten to refuse as well as accept transfers. We apply the Extended Nash Bargaining Solution to the problem of an altruistic parent and a possibly altruistic child. The parent and child first choose a threat point noncooperatively; this threat point then influences the final allocation of consumption through the standard Nash Bargaining Solution, While the potential recipient can refuse transfers from the potential donor, he cannot refuse transfers from the government. When the government redistributes between the parent and child, it changes their endowments and the equilibrium threats, and thus the final allocation of consumption. The feature of the cooperative model presented here that leads to the failure of Ricardian Equivalence may be characteristic of a wider class of cooperative and noncooperative altruism models. This feature is that noninterior strategic postures underlie interior transfer behavior and that these non- interior strategic postures are altered by government redistribution.

Suggested Citation

Kotlikoff, Laurence J. and Razin, Assaf and Rosenthal (deceased), Robert W., A Strategic Altruism Model in Which Ricardian Equivalence Does Not Hold (September 1988). NBER Working Paper No. w2699. Available at SSRN: https://ssrn.com/abstract=439610

Laurence J. Kotlikoff (Contact Author)

Boston University - Department of Economics ( email )

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Assaf Razin

Tel Aviv University - Eitan Berglas School of Economics ( email )

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National Bureau of Economic Research (NBER) ( email )

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CESifo (Center for Economic Studies and Ifo Institute)

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HOME PAGE: http://www.CESifo.de

Centre for Economic Policy Research (CEPR)

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United Kingdom

Robert W. Rosenthal (deceased)

Boston University, Department of Economics

N/A

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