NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Effects of Fiscal Policies When Incomes are Uncertain: A Contradiction to Ricardian Equivalence

Martin Feldstein

NBER Working Paper No. 2062 (Also Reprint No. r1059)
Issued in November 1986
NBER Program(s):   EFG   ME   PE

This paper shows that when earnings are uncertain the substitution of deficit finance for tax finance or the introduction of an unfunded social security program will raise consumption even if all bequests reflect intergenerational altruism. Thus, contrary to the theory developed by Barro and a number of subsequent writers, an operative bequest motive need not imply Ricardian equivalence. Since there is no uncertainty in the present analysis about the date of each individual's death, this conclusion does not depend on imperfections in annuity markets. Nor does it depend on the existence of non-lump-sum taxes and other distortions. Rather it follows from the result derived in the paper that, when an individuals future earnings are uncertain, his future bequest is also uncertain and his consumption therefore rises more in response to an increase in his current disposable income than to an equal present value increase in the disposable income of his potential heirs.

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Document Object Identifier (DOI): 10.3386/w2062

Published: From The American Economic Review, Vol. 78, No. 1, pp. 14-23, (March 1988). citation courtesy of

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