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A model of intergenerational transfers

Author

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  • Chengze Simon Fan

    (Department of Economics, Lingnan University, Tuen Mun, HONG KONG)

Abstract

Extending some existing literature, this paper formalizes the idea that intergenerational transfers occur because people care about the "characteristics" (i.e quantity and quality) of their offspring, rather than their children's welfare per se or consumption. The model analyzes this transfer motive in an infinite Markovian game framework, and it proves the existence of a stationary Markov Perfect equilibrium. Further, the analysis shows that under certain conditions, the proposed transfer motive will diminish, as the average income of an economy is sufficiently high. Thus, it suggests that as incomes continue to rise beyond a certain level, the (extended) life-cycle hypothesis will likely be a better and better approximation for explaining most people's saving behavior. This result also provides an explanation for the decline of the saving rates in the U.S. and other developed countries.

Suggested Citation

  • Chengze Simon Fan, 2001. "A model of intergenerational transfers," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 17(2), pages 399-418.
    • Handle: RePEc:spr:joecth:v:17:y:2001:i:2:p:399-418
    Note: Received: December 28, 1998; revised version: February 17, 2000
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    More about this item

    Keywords

    Intergenerational transfer; Markov perfect equilibrium; Life-cycle hypothesis.;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D10 - Microeconomics - - Household Behavior - - - General

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