I IO2 JOURNAL OF POLITICAL ECONOMY Allowing some portion of the proceeds to go to generation 2 households would not alter any of the basic conclusions The future interest payments on the government debt must be financed in some manner. Further, the principal may eventually be paid off- that is, the government may not reissue the bonds when they come due in the next period. I assume, provisionally, that the current periods interest payments are financed by a lump-sum tax levy on generation 2 householdswhile young), and that the principal is paid off at the begin- ning of the next period by an additional lump-sum tax levy on generation 2 households (while old ). In this setup there is no direct effect of the overnment debt issue and its financing on generation 3 and later gene.o tions. I examine, subsequently, the implications of imposing some part the taxes on generations of the more distant future. The generation 1 budget constraint is now A1+A8+B=c"+(1-)AB, where B represents the lump-sum transfer payment, which is assumed to occur at the beginning of the period, For generation 2, the current budget constraint is now =+(1-)A2+rB where rB represents the tax levy for the government interest payments The next periods budget constraint for generation 2 is now A2+A=c+(1-r)A+B, where B represents the tax levy for repayment of principal. The two constraints on generation 2 can be combined into a single two-period x+(1-r)A-B=C+(1-n)2+(1-r)2A2.(12) The form of equation(12)implies that the utility attainable by a member generation 2 can be written in the indirect form U/=f2*[(1-r)4-B,t,r], (13) hat is,the“ net bequest,”(1-n)A-B, determines the“ endowment for members of generation 2 From equation(10), it is also clear that ci varies inversely with (1-r)Ai-B for a given value of Ai+ Ao. Hence, given the pre- determined value of ci, and using equations (4),(10), and (13),U,can be written in the form f1[(1-n)4-B;c},A+48, For given values of ci, Ai+ Ao, w, and r, the choice problem for members of generation 1 amounts to the optimal selection of the net bequest