Fiscal Policy in an Overlapping Generations Model with Bequest‐as‐Consumption

Abstract This paper analyzes an overlapping generation (OLG) growth model wherein saving finances second period consumption and bequest‐as‐consumption. First, it looks at the market equilibrium and at the optimal solution; then it turns to the issue of decentralizing the optimal solution with various taxes and transfers. Depending on the available instruments, either a first‐best or a second‐best optimum can be achieved. Throughout the paper, the results are contrasted with those obtained in the standard OLG model without intergenerational transfers.