The Importance of Bequests and Life-Cycle Saving in Capital Accumulation: A New Answer

As the workhorse of consumption and saving research for the past four decades, the life-cycle model has proved flexible and useful for examining a variety of questions. In a classic paper, Albert Ando and Franco Modigliani (1963 p. 56) stated a key assumption of the basic model: "[tlhe individual neither expects to receive nor desires to leave any inheritance." Although the authors contended that the absence of a bequest motive was not critical to the heart of their results, the assumption set off a long-standing battle over the relative importance of different motives for saving. In an influential study, Laurence Kotlikoff and Laurence Summers (1981) estimated that a large fraction of the U.S. capital stock was attributable to intergenerational transfers. Modigliani and his collaborators vigorously disagreed and, based on their own empirical work, claimed that life-cycle saving was the primary source of capital accumulation (Modigliani, 1988). Subsequent work has failed to reach a consensus.' Since this debate began, an important advance in the consumption literature has been the incorporation of uncertainty in life-cycle models (see e.g., R. Glenn Hubbard et al., 1995). We argue that allowing for uncertainty resolves the controversy over the importance of life-cycle and bequest saving by showing that these motives for saving are overlapping and cannot generally be distinguished. A dollar saved today simultaneously serves both a precautionary life-cycle function (guarding