Deviant Generations, Ricardian Equivalence, and Growth Cycles

Abstract

TTwo equilibrium possibilities are known to obtain in a standard overlapping-generations model with dynastic preferences: either the altruistic bequest motive is operative for every generation (in which case, Ricardian equivalence obtains) or it is not, for any generation. Dynamic equilibria, where the bequest motive is occasionally operative, cannot emerge. This paper studies bequest-giving behavior and out-of-steady-state bequest and growth dynamics in a�Ak�model with intra- and inter-generational consumption externalities. These externalities, by their very presence, do not destroy Ricardian equivalence. They may, however, give rise to�deviant generations—generations that do not leave a bequest having received an inheritance, and vice versa—and that seals the fate for Ricardian equivalence. Consumption externalities may also generate interesting indeterminacies and endogenous growth cycles that did not exist otherwise.bequests; Ricardian equivalence; growth cycles; Consumption externality