Do Private Income Transfers Increase Labor Market Risk?

Abstract

Previous work on the effects of private income transfers has been confined to intra-family interactions. One implication of this work is that such transfers benefit recipients by insuring against labor market risks. Allowing for equilibrium labor market responses, however, one would expect the aggregate level of transfers to affect the distribution of wages across states of nature. In a two-state model of private income transfers with a labor market, we find that such transfers increase the volatility of wages. As a result, the equilibrium level of transfers exceeds the socially optimum level of transfers.

Keywords: Altruism, Asymmetric information, Wages, Nonmarket transactions

JEL Classification: D1, D64, D82, J3