The Effects of Fiscal Policies When Incomes are Uncertain: a Contradiction to Ricardian Equivalence

24 Pages Posted: 15 Mar 2007 Last revised: 22 Aug 2010

See all articles by Martin S. Feldstein

Martin S. Feldstein

National Bureau of Economic Research (NBER) (deceased); Harvard University (deceased)

Date Written: November 1986

Abstract

This paper shows that when earnings are uncertain the substitution of deficit finance for tax finance or the introduction of an unfunded social security program will raise consumption even if all bequests reflect intergenerational altruism. Thus, contrary to the theory developed by Barro and a number of subsequent writers, an operative bequest motive need not imply Ricardian equivalence. Since there is no uncertainty in the present analysis about the date of each individual's death, this conclusion does not depend on imperfections in annuity markets. Nor does it depend on the existence of non-lump-sum taxes and other distortions. Rather it follows from the result derived in the paper that, when an individuals future earnings are uncertain, his future bequest is also uncertain and his consumption therefore rises more in response to an increase in his current disposable income than to an equal present value increase in the disposable income of his potential heirs.

Suggested Citation

Feldstein, Martin S., The Effects of Fiscal Policies When Incomes are Uncertain: a Contradiction to Ricardian Equivalence (November 1986). NBER Working Paper No. w2062, Available at SSRN: https://ssrn.com/abstract=970924

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