Working Paper: NBER ID: w2086
Authors: B. Douglas Bernheim; Kyle Bagwell
Abstract: In his well-known analysis of the national debt, Robert Barro introduced the notion of a "dynastic family." This notion has since become a standard research tool, particularly in the areas of public finance and macroeconomics. In this paper, we critique the assumptions upon which the dynastic mode1 is predicated, and argue that this framework is not a suitable abstraction in contexts where the objective is to analyze the effects of public policies. We reach this conclusion by formally considering a world in which each generation consists of a large number of distinct individuals, as opposed to one representative individual. We point out that family linkages form complex networks, in which each individual may belong to many dynastic groupings. The resulting proliferation of linkages between families gives rise to a host of neutrality results, including the irrelevance of all public redistributions, distortionary taxes, and prices. Since these results are not at all descriptive of the real world, we conclude that, in some fundamental sense, the world is not even approximately dynastic. These observations call into question all policy related results based on the dynastic framework, including the Ricardian equivalence hypo thesis.
Keywords: Dynastic model; Public finance; Ricardian equivalence
JEL Codes: H21; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Traditional dynastic family model (J12) | neutrality results regarding public policies (J18) |
| Pervasive family linkages (J12) | no real effect of government transfers (H31) |
| Pervasive family linkages (J12) | all tax instruments equivalent to lump-sum taxes (H29) |
| Familial linkages operative (J12) | market prices play no role in resource allocation (P42) |
| Intergenerational altruism (D64) | distribution of goods (D39) |