A Bequest-Constrained Economy: Welfare Analysis

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.