Dynamic Efficiency in the Gifts Economy

Stephen A. O'Connell, Stephen P. Zeldes

NBER Working Paper No. 4318 (Also Reprint No. r1881)
Issued in April 1993
NBER Program(s):Economic Fluctuations and Growth

In the standard analysis of an overlapping generations economy with gifts from children to parents, each generation takes the actions of all other generations as given. The resulting "simultaneous moves" equilibrium is dynamically inefficient. In reality, however, parents precede children in time and realize that children will respond to higher parental saving by reducing their gifts. Incorporating this feature lowers the effective return to saving, resulting in lower steady state capital accumulation. For a broad class of gift economies, we show that the steady state capital stock in the gifts model must be on the efficient side of the golden rule. The analysis therefore overturns the standard presumption of dynamic inefficiency in the gift economy. This result reestablishes the potential relevance of the gift model to the U.S. economy, renders moot an important part of the debate on Ricardian Equivalence, extends the recent literature on the effects of implicit taxation on capital accumulation, and provides a motivation for the presence of a Social Security type system that unconditionally transfers resources from young to old.

download in pdf format
   (227 K)

download in djvu format
   (175 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w4318

Published: Journal of Monetary Economics, vol.31, no. 3, June 1993, p. 363-380 citation courtesy of

Users who downloaded this paper also downloaded* these:
Ball, Elmendorf, and Mankiw w5015 The Deficit Gamble
Abel and Bernheim w2613 Fiscal Policy With Impure Intergenerational Altruism
Abel, Mankiw, Summers, and Zeckhauser w2097 Assessing Dynamic Efficiency: Theory and Evidence
Cecchetti w2472 The Case of the Negative Nominal Interest Rates: New Estimates of the Term Structure of Interest Rates During the Great Depression
McMillan, Whalley, and Jing w2148 Incentive Effects of Price Rises and Payment-System Changes on Chinese Agricultural Productivity Growth
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us