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The Marginal Propensity to Spend on Adult Children

UPF Economics and Business Working Paper No. 667

62 Pages Posted: 30 Aug 2003  

Joseph G. Altonji

Yale University - Economic Growth Center; National Bureau of Economic Research (NBER); Yale University - Cowles Foundation

Ernesto Villanueva

Banco de España - Research Department

Multiple version iconThere are 2 versions of this paper

Date Written: June 5, 2003

Abstract

We examine how much of an extra dollar of parental lifetime resources will ultimately be passed on to adult children in the form of inter vivos transfers and bequests. We infer bequests from the stock of wealth late in life. We use mortality rates and age specific estimates of the response of transfers and wealth to permanent income to compute the expected present discounted values of these responses to permanent income. Our estimates imply parents pass on between 2 and 3 cents out of an extra dollar of expected lifetime resources in bequests and about 2 cents in transfers. The estimates increase with parental income and are smaller for nonwhites. They imply that about 15 percent of the effect of parental income on lifetime resources of adult children is through transfers and bequests and about 85 percent is through the intergenerational correlation in earnings, although these estimates are sensitive to assumptions about the intergenerational earnings correlation, taxes, and the number of children. We compare our estimates to the implications of alternative computable benchmark models of savings behavior in order to assess the likely importance of intended bequests for the wealth/income relationship.

Keywords: Bequests, intervivos transfers, permanent income

JEL Classification: D1, D31, D91, E21

Suggested Citation

Altonji, Joseph G. and Villanueva, Ernesto, The Marginal Propensity to Spend on Adult Children (June 5, 2003). UPF Economics and Business Working Paper No. 667. Available at SSRN: https://ssrn.com/abstract=428144 or http://dx.doi.org/10.2139/ssrn.428144

Joseph G. Altonji

Yale University - Economic Growth Center ( email )

Box 208269
New Haven, CT 06520-8269
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Yale University - Cowles Foundation

Box 208281
New Haven, CT 06520-8281
United States

Ernesto Villanueva (Contact Author)

Banco de España - Research Department ( email )

Alcala 50
28014 Madrid
Spain

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