Abstract
In this paper an overlapping-generations model in which generations make voluntary contributions to a public good is considered. It is described how the supply and the cost sharing of financing the public good develop in a conflict between young and old generations. It is shown that, due the strategic effects of present savings on future private and public consumption levels, generations are ‘operatively linked’. As a consequence, an intergenerational income redistribution via public debt is neutral with respect to the intertemporal resource allocation. This result has two implications: First, it suggests that the Warr Neutrality Theorem in the static standard model of voluntary public good provision can be extended to a dynamic context. Second, it shows that the Ricardian Equivalence Theorem can hold even in the absence of altruism.
We have benefitted from valuable comments and criticism of an anonymous referee and by Dirk Rübbelke.
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Notes
- 1.
For a discussion of the conditions under which Ricardian Equivalence is valid see, for example, Brennan and Buchanan (1980).
- 2.
For a simpler and more elegant proof see Cornes and Sandler (1984).
- 3.
- 4.
See Rebelein (2002, 2006) for a similar line of reasoning. He presents a two-period, two-consumer model with one-sided altruism. While a child tries to manipulate the size of its parent’s bequest strategically, the parent seeks to minimize this impact. He shows that even if parents as well as their children behave strategically, Ricardian Equivalence remains active.
- 5.
- 6.
For the idea of social contracts to enforce cooperation between generations see Kotlikoff et al. (1988).
- 7.
This is the typical characterization of individually rational behavior in the presence of a public good. Collectively rational behavior would require the adjustment of the sum of the young and the old generation’s MRS to the relative price of the public good.
- 8.
This is known as a standard result from demand theory with logarithmic utility functions.
- 9.
We assume that D is sufficiently small as to guarantee interior Nash equilibria in all periods.
- 10.
The assumption that the term of the credit ends in the same period as public good provision is not critical. Our results would be preserved for any interval [t + 1, S] with S ≤ T.
- 11.
- 12.
A similar observation was made by Carmichael (1982).
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Haslbeck, C., Peters, W. (2017). Debt Neutrality Without Altruism: Voluntary Contributions to Public Goods as ‘Operative Linkages’. In: Buchholz, W., Rübbelke, D. (eds) The Theory of Externalities and Public Goods. Springer, Cham. https://doi.org/10.1007/978-3-319-49442-5_10
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