Borrowing Constraints, Parental Altruism and Welfare,University

This paper investigates the impact of borrowing constraints on welfare in a standard overlapping-generations model where parental altruism results in transfers. I \u85nd that the average level of welfare is higher when children cannot borrow against future income. As Bernheim (1989) showed, the Nash-Cournot equilibrium does not maximize the average level of utility of cur-rently living agents; the presence of a borrowing constraint increases childrens savings and parental transfers bringing their levels closer to the optimum, raising childrens welfare as well as average welfare in the short-run and in the long-run. Additionally, borrowing constraints reduce investment on childrens education, decreasing the aggregate level of human capital, but raises aggregate savings and, hence, physical capital. When prices are exible, the latter e¤ect dominates and the positive welfare impact of the credit constraint is higher. JEL Classi\u85cation: D91, E21 Key words: borrowing constraints, altruism, overlapping generations, welfare