The Effect of Strategic Behavior on Ricardian Equivalence

Abstract

The presence of strategic behavior is often believed to be sufficient to negate the neutrality assertions of the Ricardian Equivalence Theorem. I present a two-period, two-consumer (parent and child) model with one-sided altruism. The child behaves strategically in the sense that he seeks to manipulate the size of the parent's second period transfer. The parent behaves strategically as he seeks to minimize this manipulation. I show that, for general utility functions, this form of strategic behavior does not alter the effects of a change in the timing and incidence of a lump-sum tax. The intuition for this result derives from the fact that the child's utility is a public good. Under certain conditions (present in this model) wealth redistributions have no effect on total voluntary contributions to a public good.