Self-Enforcing Intergenerational Transfers and the Provision of Education

Abstract

Due to the presence of borrowing constraints in the market, the cost of educating the young members of a family is often borne by the adults. We consider intrafamily financing of human capital under the assumptions that individuals are selfish and binding contracts are not feasible. Cooperation among family members is possible through a family norm (a family "social capital") which prescribes the obligations to be met at each stage in life and sanctions for those who deviate. We note that it is crucial that transfers to education are combined with intrafamily transfers to old-family members. We characterize the set of self-enforcing transfers and show that there is a downward bias in the family provision of education. This gives a rationale for public action as a remedy to the lack of commitment between selfish family members. The analysis also points to a number of potential effects of education policy and public pensions on human capital formation.

Keywords: Human capital investments, self-enforceable transfers, intergenerational trade, education policy

JEL Classification: D91, H22, I21