Long-run equilibria with borrowing constraints and altruism

Abstract

This paper adapts a nonstochastic overlapping generations model to include liquidity constraints and intergenerational altruism. Existing work indicates the importance of both but often considers them separately. This paper studies their interactions. First, it shows that they tend to conflict - the model only admits stationary equilibria with dynastic wealth accumulation but no binding liquidity constraints, or with binding constraints but no dynastic accumulation. Second, it examines the latter type of equilibrium closely. If liquidity constraints bind, quantitative examples imply that consequent utility losses may be small and that economywide wealth accumulation tends to be unrealistically low.