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Ponzi Games and Ricardian Equivalence

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  • Stephen A. O'Connell
  • Stephen P. Zeldes

Abstract

Under certain conditions, a government can run a "rational Ponzi game," i.e., issue debt and never repay any interest or principal. Does Ricardian equivalence hold with respect to a tax cut that is financed by such a scheme? We study this question using overlapping generations models in which generations are linked by gifts or bequests. We find that although there are multiple equilibria, Ricardian equivalence can hold, and often seems to be the most natural outcome.

Suggested Citation

  • Stephen A. O'Connell & Stephen P. Zeldes, "undated". "Ponzi Games and Ricardian Equivalence," Rodney L. White Center for Financial Research Working Papers 12-87, Wharton School Rodney L. White Center for Financial Research.
    • Handle: RePEc:fth:pennfi:12-87
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    Cited by:

    1. O'Connell, Stephen A. & Zeldes, Stephen P., 1993. "Dynamic efficiency in the gifts economy," Journal of Monetary Economics, Elsevier, vol. 31(3), pages 363-379, June.
    2. B. Douglas Bernheim, 1987. "Intergenerational Altruism and Social Welfare: A Critique of the Dynastic Model," NBER Working Papers 2288, National Bureau of Economic Research, Inc.

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