Ricardian equivalence: long-run Leviathan

This paper presents a heterogenous overlapping-generations with-altruism mo del in which intergenerational discounting is stochastic. The model nests t hree popular macro-economics models: those of Ramsey (Economic Journal, 38 (152) (1928) 543-559), Diamond (American Economic Review, 55 (1965) 1126-11 50) and a variant of the Blanchard (Journal of Political Economy 93 (2) (19 85) 223-247), Buiter (The Economic Journal 98 (391) (1988) 279-293), Weil ( Journalk of Public Economics 38 (2) (1989) 183-198) model. It is shown that , under a mild condition originally derived by Weil (Journal of Monetary Ec onomics 19 (3) (1987) 377-391), the long-run capital intensity is robust to practically every popular theoretical criticism of the standard Ricardian model. These criticisms include the imperfect inheritability of time prefer ence parameters (and hence finite horizons on the part of all households), myopia in the form of overly discounting the future, borrowing constraints, distortionary labor taxation, exchange/strategic bequest motives, common c ultural constraints (egalitarian bequests and primogeniture). endogenous fe rtility and 'joy of giving'. While precautionary saving can theoretically v iolate long-run neutrality, the asymptotic capital intensity is still bound ed below by preference parameters. The overall conclusions are sharply at o dds with those found in most articles dealing with the theoretical foundati ons of Ricardian equivalence. (C) 1999 Elsevier Science S.A. All rights res erved.