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In principle, it should be possible to tease out estimates of the relevant parameter values from available data on wealth, consumption and income, using methods like those employed in an impressive recent paper by Gourinchas and Parker (1996). Those authors assume a Residual value function” that characterizes the utility experienced during the last part of life that is mathematically very similar to the “bequest utility” function postulated in the model here. Gourinchas and Parker assume that the coefficient of relative risk aversion for the residual value function is the same as for the period utility function, and they do not incorporate a Stone-Geary term like my 7, but their estimation methodology could easily be adapted to estimate those two additional parameters. Having estimated those parameters, they could then perform simulations to gauge the predicted impact of changes in bequest taxes on consumption.

A variety of evidence, both qualitative and quantitative, strongly suggests that people at the top end of the wealth and income distributions behave in ways that are substantially different from the behavior of most of the rest of the population. In particular, it is difficult to explain the behavior of these consumers using the standard Life Cycle model of consumption. A leading alternative to (or perhaps just an extension of) the Life Cycle model is the Dynastic model in which the decisionmaker cares about the utility of his descendants. The Dynastic model, however, has problems of its own, starting with the testimony of many wealthy households who say that providing an inheritance is not a principal motivation for saving and ending with the fact that childless wealthy old people do not appear to dissave. I argue that the simplest model capable of fitting all the facts is a model in which wealth either enters the utility function directly as a luxury good, or wealth yields a stream of services that enter the utility function in ways that would be formally virtually indistinguishable from a model in which wealth enters the utility function directly.

In a way, the model reconciles Fitzgerald and Hemingway. Fitzgerald was right that rich do not behave simply as scaled-up versions of everyone else. They choose to save more and to accumulate faster because they can “afford” the luxury of doing so. But Hemingway was right to suggest that the rest of us would probably behave the same way, if only we had more money.