Abstract:

A subsequent generations model is used to characterize consumption allocation under the future generation's income uncertainty. Altruistic concerns toward the future generation gives rise to precautionary bequests which act as a hedge on risk. It is shown that given a first-order correlation between mean future income and the present generation's income, government intervention can provide a Pareto improvement through a tax-transfer policy with universal participation. This policy acts as a substitute for precautionary bequests. Distributional aspects of the tax-transfer policy are also discussed.