Random earnings differences, lifetime liquidity constraints, and altruistic intergenerational transfers

Abstract

This paper develops a model of private savings behavior in which households care about their descendants, cannot have negative net worth, and have lifetime earnings depending on random draws from an exogenous distribution of abilities. The elements interact: very lucky parents are likely to leave large estates; constrained children are unusually likely to receive intergenerational transfers. The paper proves the existence of a stationary cross-sectional distribution of wealth, endogenously determines where liquidity constraints will bind, and shows that the long-term interest rate must be such that Ricardian neutrality fails. Its last section generates several illustrative numerical simulations.