Working Paper: NBER ID: w2779
Authors: Marc Nerlove; Assaf Razin; Efraim Sadka
Abstract: Bequest constraints have played a major role in discussions of debt neutrality but their welfare implications were not sufficiently dealt with in the literature. In this paper we focus on the welfare implications of bequest constraints. We found that when institutional constraints to the transfer of resources from children to their parents exists the welfare of the parents' generation may be improved by an old age security scheme. Such a scheme is justified not by income redistribution consideration, as is typically the case, but rather on pure efficiency grounds. Due to its intergenerational transfer role the social security scheme is Pareto-improving with altruistic parents if, in addition, the real income effect which tends to raise children consumption is relatively strong.
Keywords: bequest constraints; welfare analysis; social security
JEL Codes: H55; D91
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| old age security scheme (H55) | improved welfare of the parents' generation (I39) |
| bequest constraints (D14) | improved welfare of the parents' generation (I39) |
| optimal allocation of resources (c1, n, c2, b) (D61) | higher utility for parents (D15) |
| social security scheme (H55) | Pareto improving under altruism among parents (D64) |
| without constraints (C29) | distorted investment in human capital (D29) |
| distorted investment in human capital (D29) | suboptimal outcomes for parents and children (J13) |