The Role of Inter Vivos Giving in General Equilibrium

Abstract

This paper studies the welfare aspects of inter vivos giving in a dynamic general equilibrium. Although the intergenerational transfer made by a living parent to a liquidity-constrained child is easily found, the welfare aspects of this inter vivos giving have not been widely studied. An applied life-cycle model built on the observed pattern from the micro data can explain the substantial dierence in wealth between a recipient and a non-recipient. After comparing the age-wealth distribution produced in a model economy to the corresponding distribution in the US economy, this paper investigates how individual welfare is inuenced when giving is encouraged by elimination of the gift tax in the steady-state. The model shows that lowering the gift tax rate is Pareto-improving in the long run by achieving higher average consumption, a smoother lifetime consumption path and an increase in saving.