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Strategic Behavior, Debt Neutrality, and Crowding Out

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  • Robert P. Rebelein

    (Vassar College, Poughkeepsie, New York)

Abstract

This article presents an overlapping generations model in which children seek to manipulate the size of the end-of-life bequest they receive from the parent. The author first uses numerical simulations to showthis intergenerational strategic behavior does not negate the debt neutrality assertions of Ricardian equivalence. Then, by introducing capital gains and inheritance taxes, the author shows the crowding out effect of government debt is notably smaller in models with strategic behavior; manipulation by children increases the importance of bequests, which forces parents to save (and bequeath) a larger portion of a debt-financed tax cut. In spite of the neutrality of debt under lump sum taxes, including intergenerational strategic behavior can significantly influence the outcome of government tax policies.

Suggested Citation

  • Robert P. Rebelein, 2006. "Strategic Behavior, Debt Neutrality, and Crowding Out," Public Finance Review, , vol. 34(2), pages 148-172, March.
    • Handle: RePEc:sae:pubfin:v:34:y:2006:i:2:p:148-172
    DOI: 10.1177/1091142105284214
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    Cited by:

    1. Mr. Manmohan S. Kumar & Mr. Emanuele Baldacci, 2010. "Fiscal Deficits, Public Debt, and Sovereign Bond Yields," IMF Working Papers 2010/184, International Monetary Fund.

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