Income Uncertainty and Ricardian Equivalence.

It is well known that "pure" Ricardian equivalence fails whenever there is a nonzero probability for a corner solution in the future. The interesting question remains whether consumers seem more Keynesian or more Ricardian (by consuming or saving, respectively, a substantial portion of an announced and noncontingent tax cut). For the case of income uncertainty, and assuming precautionary behavior, I have shown that the answer depends on the characteristics of the corner solutions. If the corner solution has to do with parental poverty (when marginal utility is sensitive to extra consumption), the transfer given by the government allows for a substantial reduction of precautionary savings and consequently the departure from Ricardian equivalence looks Keynesian. If it has to do with children's wealth, marginal utility is less sensitive to extra consumption, and consequently the results appear Ricardian. This finding Stresses the importance of differentiating among different types of income uncertainty.