Dynamic Efficiency in the Gifts Economy

29 Pages Posted: 2 Jan 2007

See all articles by Stephen A. O'Connell

Stephen A. O'Connell

Swarthmore College - Economics Department; University of Oxford - Centre for Study of African Economics

Stephen P. Zeldes

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Date Written: April 1993

Abstract

In the standard analysis of an overlapping generations economy with gifts from children to parents, each generation takes the actions of all other generations as given. The resulting "simultaneous moves" equilibrium is dynamically inefficient. In reality, however, parents precede children in time and realize that children will respond to higher parental saving by reducing their gifts. Incorporating this feature lowers the effective return to saving, resulting in lower steady state capital accumulation. For a broad class of gift economies, we show that the steady state capital stock in the gifts model must be on the efficient side of the golden rule. The analysis therefore overturns the standard presumption of dynamic inefficiency in the gift economy. This result reestablishes the potential relevance of the gift model to the U.S. economy, renders moot an important part of the debate on Ricardian Equivalence, extends the recent literature on the effects of implicit taxation on capital accumulation, and provides a motivation for the presence of a Social Security type system that unconditionally transfers resources from young to old.

Suggested Citation

O'Connell, Stephen A. and Zeldes, Stephen P., Dynamic Efficiency in the Gifts Economy (April 1993). NBER Working Paper No. w4318. Available at SSRN: https://ssrn.com/abstract=478732

Stephen A. O'Connell (Contact Author)

Swarthmore College - Economics Department ( email )

Swarthmore, PA 19081
United States
610-328-8107 (Phone)
610-328-7352 (Fax)

HOME PAGE: http://www.swarthmore.edu/SocSci/soconne1/

University of Oxford - Centre for Study of African Economics

Wellington Square
Oxford OX1 3JP
United Kingdom

Stephen P. Zeldes

Columbia Business School - Finance and Economics ( email )

3022 Broadway
Uris 825, Dept. of Finance & Economics
New York, NY 10027
United States
212-854-2492 (Phone)
212-208-4699 (Fax)

HOME PAGE: http://www.columbia.edu/~spz1

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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