Familial Love and Intertemporal Optimality
NBER Working Paper No. 695
This paper analyzes the intertemporal efficiency and optimality of steady states within overlapping-generations models in which the utility of individual working couples , depends on the consumption of their parents and children as well as their own consumption. The analysis considers both a basic model in which altruistic behavior can take only the form of gifts of consumption goods from working couples to their retired parents and an extended model in which altruistic behavior also can take the form of bequests from parents to their surviving children. In the basic model, saving only involves storing consumption goods, whereas the extended model includes capital and neoclassical production. The following conclusions from the analysis apply to both models: An altruistic utility function promotes inter-temporal efficiency. However, altruism creates an externality that implies that satisfying the conditions for efficiency does not insure intertemporal optimality. Nevertheless, if the utility of working couples is appropriately sensitive at the margin to their own consumption, their parents consumption, and their children's consumption, the steady state that is consistent with individual behavior is both efficient and optimal.