TY - JOUR
T1 - Ricardian equivalence in the presence of capital market imperfections
AU - Yotsuzuka, Toshiki
PY - 1987/9
Y1 - 1987/9
N2 - It is a common claim that Ricardian equivalence fails if capital markets are imperfect. The validity of this claim is examined for the case of informationally imperfect capital markets. We present three alternative models of adverse selection and analyze the effects of debt finance in these models. It is shown that a debt-financed tax cut can lead to Pareto improvement in some cases. In the theoretically most preferable model, however, Ricardian equivalence survives in spite of genuine imperfections in the capital market. The results point to the importance of specifying the exact nature of imperfection.
AB - It is a common claim that Ricardian equivalence fails if capital markets are imperfect. The validity of this claim is examined for the case of informationally imperfect capital markets. We present three alternative models of adverse selection and analyze the effects of debt finance in these models. It is shown that a debt-financed tax cut can lead to Pareto improvement in some cases. In the theoretically most preferable model, however, Ricardian equivalence survives in spite of genuine imperfections in the capital market. The results point to the importance of specifying the exact nature of imperfection.
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U2 - 10.1016/0304-3932(87)90023-7
DO - 10.1016/0304-3932(87)90023-7
M3 - Article
AN - SCOPUS:38249033414
SN - 0304-3932
VL - 20
SP - 411
EP - 436
JO - Carnegie-Rochester Confer. Series on Public Policy
JF - Carnegie-Rochester Confer. Series on Public Policy
IS - 2
ER -