The Effects of Fiscal Policies When Incomes are Uncertain: A Contradiction to Ricardian Equivalence
Year: 1986
Type: report
Abstract: This paper shows that when earnings are uncertain the substitution of deficit finance for tax finance or the introduction of an unfunded social security program will raise consumption even if all bequests reflect intergenerational altruism.Thus, contrary to the theory developed by Barro and a number of subsequent writers, an operative bequest motive need not imply Ricardian equivalence.Since there is no uncertainty in the present analysis about the date of each individual's death, this conclusion does not depend on imperfections in annuity markets.Nor does it depend on the existence of non-lump-sum taxes and other distortions.Rather it follows from the result derived in the paper that, when an individuaPs future earnings are uncertain, his future bequest is also uncertain and his consumption therefore rises more in response to an increase in his current disposable income than to an equal present value increase in the disposable income of his potential heirs.
DOI: 10.3386/w2062
Author: Martin Feldstein
Institutions: National Bureau of Economic Research, Harvard University
Language: English
Subfield: Economics and Econometrics
Domain: Social Sciences
SDG: No poverty
Open Access status: green
OpenAlex ID: W2177941346