Robert / Barro 43 why unintended bequests are significant. But this reasoning is backwards, since annuities do not entail greater adverse selection problems than many other types of insurance. The small amount of private annuities outstanding, other than the substan- tial amount in the form of pensions, reflects primarily a lack of demand, which itself is an indication that people desire to make the most of the bequests that occur. In any event, since the Ricardian results involve a broad concept of intergenerational transfers, rather than especially bequests at death, a focus on formal bequests is misplaced Imperfect I Many economists argue that the imperfection of private credit markets is central to an analysis of the public debt; see, for example, robert Mundell (1971). To consider this argument, assume that a closed economy consists of two types of infinite-lived economic agents; those of group a who have the same discount rate,r, as the government(and are therefore willing to hold the government's debt), and those of group B who have the higher discount rate, F>r. The constituents of group A would include large businesses, pension funds, and some individuals. The members of group B, such as small businesses and many households, possess poor collateral therefore, loans to these people imply large costs of evaluation and enforcement. It follows that the members of group B face higher borrowing rates(even after an allowance for default risk)than the government. Whether or not they are actually borrowing, the high discount rate i for group B corresponds to a high rate of time preference for consumption and a high marginal return on investment. Suppose that the government cuts current taxes and runs a budget Further, assume that the division of the tax cut between groups A and fifty-fifty-is the same as the division of the higher future taxes needed extra debt. Since those from group A experience no net change in wealth, they illingly hold their share of the extra public debt. For group B, where the discount rate i exceeds r, the present value of the extra future taxes falls short of the tax cut The members of this group are better off because the tax cut effectively enables them to borrow at the lower interest rate, r. This cut in the effective borrowing rate motivates the members of group B to raise current consumption and investment B In the aggregate a budget deficit now raises aggregate demand, or equivalently aggregate of desired private saving increases by less than one-to-one with the government's deficit It follows that the real interest rate r, which applies to group A and the government, must rise to induce people to hold the extra public debt. Hence there is crowding out of consumption and investment by members of group A. For group B, the opportunity to raise current consumption and investment means that the rate of time preference for consumption and the marginal return to investment would decline. That is, the discount rate F falls. Thus, the main effects are a narrowing of the spread between the two discount rates, r and i, and a diversion of current expendi tures from group a to group B In the aggregate investment may either rise or fall and the long-term effect on the capital stock is uncertain. The major change, however