Parental Altruism and Inter Vivos Transfers: Theory and Evidence

Abstract

This paper uses PSID data on the extended family to test whether inter vivos transfers from parents to children are motivated by altruism. Specifically, the paper tests whether an increase by one dollar in the income of parents actively making transfers to a child coupled with a one-dollar reduction in that child's income results in the parents' increasing their transfer to the child by one dollar. This restriction on parental and child transfer-income derivatives is derived for the standard altruism model augmented to include uncertainty and liquidity constraints. These additional elements pin down the timing of inter vivos transfers. The method used to estimate income-transfer derivatives takes into account unobserved heterogeneity across families in the degree of altruism. The findings strongly reject the altruism hypothesis. Redistributing one dollar from a recipient child to donor parents leads to less than a 13-cent increase in the parents' transfer to the child, far less than the one-dollar increase implied by altruism.

JEL Classification: D31