Bequests as signals: Implications for fiscal policy

This paper explores how bequests affect redistributive fiscal policies. The main premise underlying our approach is that bequests act as a signal of parental affection. It is shown that private transfers in the form of bequests may not offset public transfers to a significant extent, even though such private transfers are altruistically motivated and are strictly positive for all but a negligible set of households. This is notable since these conditions are normally believed to yield a fully offsetting response (Ricardian equivalence). We explicitly identify circumstances under which the departure from Ricardian equivalence is large. Notably, the departure may be quite large even when our model is observationally very close to one in which Ricardian equivalence is known to hold (in the sense that children care very little about parental affection).