Article

Demonstration Effect and Dynamic Efficiency

Emmanuel Thibault

Abstract

Can dynamic inefficiency be remedied by intergenerational family transfers? The issue matters for the connection between fiscal policy and economic growth. Yet family transfers have mostly been narrowly cast as altruistic. I show that an alternative motive the demonstration effect, whereby parents transfer to mold preferences of children can generate vastly different results: family transfers are positive under dynamic inefficiency. These transfers are instrumental to depress capital accumulation so as to approach the Golden Rule capital stock. Intuitively, family transfers from youth to old age reduce capital accumulation. However, family transfers are nil under dynamic efficiency. Unlike public debt, both capital accumulation and welfare are not worsened.

Keywords

OLG model; Dynamic efficiency; Intergenerational family transfers;

JEL codes

  • C62: Existence and Stability Conditions of Equilibrium
  • D91: Intertemporal Household Choice • Life Cycle Models and Saving
  • O41: One, Two, and Multisector Growth Models

Replaces

Emmanuel Thibault, Demonstration Effect and Dynamic Efficiency, TSE Working Paper, n. 16-616, January 2016.

Published in

Economics Letters, Elsevier, vol. 147, October 2016, pp. 42–45