Deviant Generations, Ricardian Equivalence, and Growth Cycles

Richard C. Barnett (), Joydeep Bhattacharya () and Helle Bunzel

Staff General Research Papers from Iowa State University, Department of Economics

Abstract: Only one of two equilibrium possibilities arise in standard overlapping generation models with dynastic preferences: either the altruistic bequest motive is operative for every generation (in which case, Ricardian equivalence obtains) or it is not, for any generation. This paper introduces cross-generational consumption externalities into a AK model with overlapping generations. It is shown that the model economy does not support a steady-state equilibrium in which inheritances are received and bequests left at every date; hence Ricardian equivalence fails. There does exist, however, out-of-steady state equilibria in which the bequest motive is occasionally operative; i.e., there are `deviant' generations that do not leave a bequest even though they received an inheritance, and vice versa. This is in line with commonly-held beliefs in the United States that the World War II generation is `generous' while the baby boomer generation is `stingy' and out to `spend their kids' inheritance'. The cross-generational consumption externalities are also capable of generating endogenous growth cycles that did not exist otherwise.

Keywords: Ricardian equivalence; bequests; growth cycles; overlapping generations; bequest motive (search for similar items in EconPapers)
JEL-codes: E0 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge and nep-mac
Date: 2008-05-19
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Persistent link: http://EconPapers.repec.org/RePEc:isu:genres:12939

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