We show that contrary to conventional wisdom intergenerational family transfers dominate fiscal policies as a remedy to the dynamic inefficiency arising in a Diamond (1965, American Economic Review) economy with logarithmic utility and Cobb-Douglas technology. Using the demonstration-effect approach popularized by Cox and Stark (2005, Journal of Public Economics), we prove that, differently from public debt, family transfers can serve the role of automatic stabilizers. Indeed, they are nil under dynamic efficiency, implying that both capital accumulation and welfare are not worsened. They are positive under dynamic inefficiency, and instrumental to depress capital accumulation so to approach the Golden Rule capital stock.
OLG model; Dynamic efficiency; Intergenerational family transfers;
- C62: Existence and Stability Conditions of Equilibrium
- D91: Intertemporal Household Choice • Life Cycle Models and Saving
- O41: One, Two, and Multisector Growth Models
Longevity Risk, Long Term Care (Social) Insurance