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Ricardian Equivalence Survives Strategic Behavior, by Robert P. Rebelein (October 2004)

Robert Barro (1974) showed government debt has no real effects when generations are linked by altruistically motivated intergenerational transfers, a result now known widely as the Ricardian Equivalence Theorem.

An important condition for debt neutrality is believed to be the absence of strategic interactions between members of different generations. I use a simple two-period, parent and child model in which the parent is altruistic, to show Ricardian equivalence holds in the presence of intergenerational strategic behavior for a broad class of utility functions. The intuition for this result derives from the fact that the child’s utility is a public good.

Working Paper (274 K, PDF)