Parental altruism, life expectancy and dynamically inefficient equilibria

Macrodynamic models with finite lifetime and selfish individuals may feature (dynamically) inefficient equilibria, while models with infinite lifetime and altruistic individuals cannot. However, savings motives increase with parental altruism and lifetime expectancy, thereby favoring overaccumulation. This paper presents a continuous time OLG model which generalizes the Blanchard-Buiter-Weil model and allows to clarify the relationships between dynastic altruism, the length of planning horizons, and dynamic (in)efficiency. Our main innovation relies on the introduction of parental altruism, whose intensity is variable. We reach three main conclusions. First, we show that parental altruism and life expectancy do favor overaccumulation. Second, we explain why the Ramsey model only displays dynamic efficiency.A necessary condition for inefficiency actually implies the nonexistence of a dynamic competitive equilibrium. Third, theoretical results are illustrated by a parameterization from US data. Our numerical exercises suggest that the US economy is dynamically efficient, mainly because life expectancy is sufficiently short