On the Implications of Two-Sided Altruism in Human-Capital-Based OLG Model

Abstract

This article summarizes some propositions regarding economic dynamics and implications of two-way altruism, on the basis of the human-capital-based OLG model of Ehrlich and Lui (1991) and Ehrlich and Kim (2007) with application of a modified, fertility-endogenized definition of linearly separable two-way altruism examined by Abel (1987) and Altig and Davis (1993). Some properties in both a transition process and a steady state, and the effect of unfunded social security on an equilibrium path are also discussed. My calibration results and analyses show that (1) the combination of altruism toward parents and children is crucial for determining a threshold level of initial human capital and productivity in a transition process (stagnant to growth or growth to stagnant), and the generation’s attained utility, (2) dynamic consistency might not necessarily be the best choice to overpass the stumbling block against growth regime, (3) in this human-capital-based OLG model, a regular recursive induction approach might still cause inefficiency in terms of an ex-post Pareto optimality criterion as of two periods later, even if strategic effects for after children (two generations later) are appropriately taken account of, and (4) unfunded social security tax, which involves actuarially fair insurance as well as certainty premium transfer, does affect critical values for a regime change as well as dynamic equilibrium paths and corresponding subsequent life strategies, even in two-way altruistic economy.