Borrowing Constraints, Parental Altruism and Welfare

Jorge Soares ()
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Jorge Soares: Department of Economics,University of Delaware

No 08-12, Working Papers from University of Delaware, Department of Economics

Abstract: This paper investigates the impact of borrowing constraints on welfare in a standard overlapping-generations model where parental altruism results in transfers. I find that the average level of welfare is higher when children cannot borrow against future income. As Bernheim (1989) showed, the Nash-Cournot equilibrium does not maximize the average level of utility of currently living agents; the presence of a borrowing constraint increases children's savings and parental transfers bringing their levels closer to the optimum, raising children's welfare as well as average welfare in the short-run and in the long-run. Additionally, borrowing constraints reduce investment on children's education, decreasing the aggregate level of human capital, but raises aggregate savings and, hence, physical capital. When prices are flexible, the latter effect dominates and the positive welfare impact of the credit constraint is higher.

Keywords: borrowing constraints; altruism; overlapping generations; welfare (search for similar items in EconPapers)
JEL-codes: D91 E21 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2008
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Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Borrowing constraints, parental altruism and welfare (2015)
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