November 2, 2002
Shinichi Nishiyama and Kent Smetters
Several important empirical studies (for example, Altonji, Hayashi, and Kotlikoff, 1992, 1996, 1997) have found that households are not altruistically linked in a way consistent with the standard Ricardian model, as put forward by Barro (1974). We built a two-sided altruistic-linkage model in which private transfers are made in the presence of two types of shocks: an observable shock that is public information (for example, public redistribution) and an unobservable shock that is private information (for example, idiosyncratic wages). Parents and children observe each other s total income but not each other's effort level. In the second-best solution, unobservable shocks are only partially shared, whereas, for any utility function satisfying a condition derived herein, observable shocks are fully shared. The model, therefore, can generate the low degree of risk sharing found in the recent studies, but Ricardian equivalence still holds.