Escaping the Samaritan's Dilemma: Implications of a Dynamic Model of Altruistic Intergenerational Transfers

Abstract

This paper explores how altruistic parents structure transfer rules in response to potential incentive problems and how the investment behavior of children is influenced by these transfer policies. To investigate these issues, I develop a dynamic model of altruistic transfers in which transfers can be tied to the purchase of human capital investment. Numerical solutions are examined to provide insight into the predictions of the model for transfer behavior and investment by family size. The dynamic framework developed in the paper is used to guide the interpretation of data on transfers and education investment by children in the Health and Retirement Survey. The data are consistent with the prediction of the model that children in larger families invest more in education conditional on initial transfers.

Keywords: Intergenerational transfers, altruism, education

JEL Classification: J10, J11