The Market Value of Family Values

Abstract

This paper analyzes how transfers among family members affect the behavior of transfer recipients in the market, and how market prices reflect the presence of such nonmarket transfers. Parental and spousal transfers are motivated both by altruism and by a desire to use the transfers to impart specific values or behaviors to the recipient. When altruistic transfers predominate and the altruism is not completely reciprocated by the recipients, transfers aimed at insuring family members against market risk may have the unintended effect of increasing market risk for the beneficiaries, thus raising market transaction costs. This is due to the disincentive effect of familial transfers on the effort decisions of the recipients, whether in the labor market or insurance market. This, in turn, lowers expected output for market firms, which attempt to re-impose market discipline and realign incentives through layoffs and contracts that provide less security for workers. The problem is mitigated when parents care directly about the actions of their children and use transfers to instill values. But Government social schemes provide substitutes to family transfers that reduce parental influence on children's activities and lead to the bad market outcomes described above. Thus, government programs need to be redesigned to reinforce rather than usurp family values and parental influence over their children.

JEL Classification: D63, D64