On the Implications of Two-Sided Altruism in Human Capital Based OLG Model

This article summarizes some propositions regarding economic dynamics and implications of two-sided altruism, on the basis of the human-capital-based OLG model of Ehrlich and Lui (1991), with application of a modified, fertility-endogenized definition of linearly separable two-sided altruism by Abel (1987) and Altig and Davis (1993). Some properties in both transition processes and steady states, the effects of unfunded social security on an equilibrium path, and the implications in the context of so called the Samaritan’s dilemma and the Recardian equivalence are also analyzed. Finally some policy implications are summarized. Our calibration results and analyses show that (1) the combination of altruism toward parents and children is crucial for determining a threshold level of initial human capital and education technology in a transition process (stagnant to growth or growth to stagnant) with an irreversible hysteresis aspect, (2) a regular recursive induction approach might still cause inefficiency in terms of an ex-post Pareto optimality criterion as of two periods later, even if strategic effects for after children (two generations later) are appropriately taken account of, and (3) unfunded social security, which involves actuarially fair insurance as well as certainty premium transfer, might not affect either saving or critical values for regime change so drastically.