Aspirations, Habit Formation, and Bequest Motive


We analyze how the presence of endogenous preferences affects the altruistic bequest motive from parents to children. We will show that the existence of habits raises the threshold value of the intergenerational discount factor above which altruistic bequests are positive, while aspiration formation could push this value down. Therefore, the dynamic inefficiency of the economy with no altruism is not sufficient to prevent the bequest motive from being operative under aspiration formation. We also discuss the implications of public debt when the bequest motive is inoperative and preferences exhibit habit and aspiration formation.
Published as: Monetary policy and exchange rate volatility in a small open economy in Review of Economic Studies , Vol. 72, No. 3, 707-734, July, 2005