OLG_Bequest_SL

OLG_Bequest_SL - Bequests and Dynamic E ciency Prof Lutz...

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Bequests and Dynamic E¢ ciency Prof. Lutz Hendricks August 5, 2009 L. Hendricks () Bequests and Dynamic E¢ ciency August 5, 2009 1 / 21
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Bequests If parents leave bequests to their children, does that solve the dynamic e¢ ciency problem? The answer is no - bequests can only increase the capital stock. L. Hendricks () Bequests and Dynamic E¢ ciency August 5, 2009 2 / 21
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Bequests Why do parents leave bequests to their children? Empirically, we don°t know (a possible research question). Theoretically, there are various ways of modeling bequests: 1 Altruism : parents value their children°s utility. 2 Warm glow : parents value the bequest itself (a reduced form). 3 Strategic : parents promise bequests so kids behave well. L. Hendricks () Bequests and Dynamic E¢ ciency August 5, 2009 3 / 21
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Bequests Results 1 If parents leave strictly positive bequests, the economy must be dynamically e¢ cient. 2 A dynamically ine¢ cient economy is not a/ected by a bequest motive. 3 Households linked by bequests look like they live forever . This motivates many models with in±nitely lived households. It only works if bequests are altruistic and always positive. L. Hendricks () Bequests and Dynamic E¢ ciency August 5, 2009 4 / 21
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OLG Model With Altruism L. Hendricks () Bequests and Dynamic E¢ ciency August 5, 2009 5 / 21
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Household Each household has ( 1 + n ) children when old. The household values own consumption according to u ( c y t , c o t + 1 ) The household also values the utility of the child.
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