Deficits, Gifts, and Bequests: Ricardian Equivalence Revisited

This paper studies deviations from Ricardian equivalence for deficit-financed tax cuts of various durations in an incomplete-markets overlapping-generations (OLG) economy with imperfect altruism. The novel feature is that generations’ degrees of altruism are calibrated to aggregate data on inter-vivos transfers. The results of this economy are contrasted with two workhorse models, a dynastic economy and a standard OLG economy, both of which make strong implicit assumptions on altruism. Deviations from Ricardian equivalence in the imperfectaltruism economy are even larger than those in the standard OLG economy, welfare implications, however, tend to be closer to the dynastic economy. JEL