Like Father, Like Son: Inheriting and Bequeathing

Abstract

Abstract This paper incorporates indirect reciprocal behavior in the context of bequeathing decisions into an otherwise standard OLG model. We provide conditions for the existence of a unique steady state with operative bequests. Contrary to standard OLG models, we show that taking into account such behavioral interactions allows one to rationalize both an increasing and U-shaped pattern of the inheritance to GDP ratio over time, consistent with recent empirical evidence. Moreover, the model predicts a nonlinear (U-shaped) relationship between the size of an unfunded social security program and the long-run stock of per capita capital, which in turn provides a novel explanation of the inconclusive empirical findings on the relationship between social security, savings and long-run growth. Ricardian equivalence is shown to hold in a special case of the model.