Abstract
This paper uses experimental methods to analyze Ricardian equivalence when the probability of debt retirement is less than one. The results suggest that the presence of outstanding debt and the probability of debt retirement have a strong influence on savings behavior. When the probability of debt retirement is low, consumption by the current generation increases, as predicted by Keynesian theory. However, as the probability of debt retirement increases, bequests rise to offset the future generation's expected repayment liability, and deficit spending becomes much less expansionary, as predicted by Ricardian theory. In general, the average bequest is significantly larger when an outstanding debt is passed on to the next generation than when no debt exists, regardless of the probability of debt retirement. However, as long as there is some uncertainty about debt repayment, the presence of debt always stimulates some additional consumption, so that strong variants of Ricardian equivalence are not found.
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We would like to thank Joanne Feeney, Glenn Harrison, and William Schulze for helpful comments, and Doreen Petersen for programming assistance.
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Slate, S., McKee, M., Beck, W. et al. Testing Ricardian equivalence under uncertainty. Public Choice 85, 11–29 (1995). https://doi.org/10.1007/BF01047899
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DOI: https://doi.org/10.1007/BF01047899