Family Altruism and Incentives
38 Pages Posted: 20 Apr 2016
Date Written: November 30, 1999
In the presence of imperfect information and uncertainty, altruistic parents might use intergenerational transfers strategically to elicit effort from their children. As a result, gifts and bequests are less reactive to the income realizations of the children than the standard altruistic model of the family predicts. Ricardian equivalence holds in this setup whenever the non-negativity constraint on bequests is not binding.
Gatti builds on the altruistic model of the family to explore the strategic interaction between altruistic parents and selfish children when children's efforts are endogenous. If there is uncertainty about the amount of income the children will realize, and if parents have imperfect information, the children have an incentive to exert little effort and to rely on their parents' altruistically motivated transfers. Because of this, parents face a tradeoff between the insurance that bequests implicitly provide their children and the disincentive to work prompted by their altruism.
Gatti shows that if parents can credibly commit to a pattern of transfers, they will choose not to compensate children in bad outcomes as much as predicted by the standard (no uncertainty, no asymmetric information) dynastic model of the family. Alternatively, parents may choose to forgo any insurance and offer a fixed level of bequest, to elicit greater effort from their children.
The optimal transfers structure that Gatti derives reconciles the predictions of the altruistic family model with much of the existing evidence on intergenerational transfers, which suggests that parents compensate only partially, or not at all, for earnings differentials among their children.
Moreover, Gatti shows that Ricardian equivalence holds in this setup, except when non-negativity constraints are binding.
This paper - a product of Macroeconomics and Growth, Development Research Group - is part of a larger effort in the group to understand intrahousehold resource allocation.
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