Volume 3, Issue 1, November 2001
Kotlikoff’s Essays on Saving, Bequests, Altruism, and Life-Cycle Planning
Laurence J. Kotlikoff is now well known for his work on intergenerational issues. 14 of his essays, 5 not previously published, on this general topic have been reunited in a book that offers the various facets of his work. Three fields are covered. First, 3 essays on savings and bequests documents that the life-cycle theory is capable of explaining the secular decline in the U.S. savings rate with the massive redistribution between generations introduced after WWII in which older people receive annuities that reduce incentives to save. This increased wealth inequality and reduced the wealth equalizing effect of unintentional bequests.
The next five essays tackle voluntary bequests. Kotlikoff and coauthors show that intergenerational altruism is largely absent from the data: the distribution of average within-cohort consumption changes depends on that of average within-cohort resource changes, the same applying within extended families, and families with transfers have only small and insignificant voluntary transfers compared to the forced ones. Barro’s Ricardian Equivalence then looses credence not only empirically, but theoretically as well as two essays show: strategic transfer behavior between parents and children are altered by exogenous redistribution, and asymmetric information prevents parents from enforcing efficient effort of their children.
The last 6 essays pertain to life-cycle planning, already the subject of a recent book by Kotlikoff. Here, some the new book present some older evidence that households do not optimize intertemporally, namely that consumption does not only depend on new information, household over-discount future earnings, both in experiments and in empirical data, households are largely financially illiterate and often poorly advised. Then a financial planning tool is introduced and used to show how people close to retirement are under-saving, except for low-income households who can rely on social security.
Any student of life-cycle behavior and savings should have this collection of essays on his/her bookshelf. It provides several challenges to current modelling of intertemporal household behavior that should keep researchers (and practitioners) busy for quite a while.
“Essays on Saving, Bequests, Altruism, and Life-Cycle Planning” is published at MIT Press.