Operative Gift and Bequest Motives

Abstract

In a pioneering paper, Barro (1 974) demonstrated that if consumers have operative altruistic bequest motives, then a reduction in lump-sum taxes accompanied by the issue of an equal amount of government bonds has no effect on the eflocation of resources. Berro stressed that this result, which has come to be known as the Picardian Equivalence Theorem, requires that the bequest motive be operative. In this context, the term "operative" means that equilibrium bequests are determined by tangencij conditions rather than by corner solutions such as meg arise from binding non-negativity constraints. If the bequest motive is not operative, then the Ricardian equivalence result presented by Barro does not hold and there are important effects associated with the governments choice between debt finance and taxes.