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Is the Extended Family Altruistically Linked? Direct Tests Using Micro Data

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  • Joseph G. Altonji
  • Fumio Hayashi
  • Laurence J. Kotlikoff

Abstract

What is the basic economic decision-making unit? Is it the household or the extended family? This question is fundamental to economic analysis and policy design. The answer given by the Life Cycle and Keynesian models is that the economic unit is the household. According to these models, members of particular households act selfishly and do not fully share resources with extended family members in other households. Hence, altering the distribution of resources across households within the extended family will alter the consumption and labor supply of those households who acquire or lose resources. In contrast to the Life Cycle and Keynesian models, the altruism model implies that the extended family is the basic economic decision-making unit. According to this model the extended family is linked through altruism and, as a result, acts as if it fully shares resources. In the altruism model nondistortionary changes in the distribution of resources across households within the extended family will have no effect on the consumption or labor supply of any of its members. Despite its importance, the boundaries of economic decision-making units have not, to our knowledge, been examined directly with micro data. Stated differently, the altruism model has not been tested against the Life Cycle and Keynesian alternatives with such data. This paper uses matched data on parents and their adult children, contained in the Panel Study of Income Dynamics, to perform such a test. In essence our test asks whether the distribution of consumption and labor supply across households within the extended family depends on the distribution of resources across households within the extended family. Our findings provide quite strong evidence against the altruism model. The distribution of resources across households within the extended family is a highly significant (statistically and economically) determinant of the distribution of onsumption within the extended family. This finding holds for the entire sample as well as the subsample consisting of rich parents and poor children. In addition to showing that the distribution of extended family resources matters for extended family consumption, we test the life cycle model by asking whether only own resources matter, i.e., whether the resources of extended family members have no affect on a household's consumption. Our results indicate that extended family member resources have, at most, a modest effect on household consumption after one has controlled for the fact that extended family resources help predict a household's own permanent income.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3046.

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Date of creation: Jul 1989
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Publication status: published as American Economic Review, Vol. 82, No. 5, pp. 1177-1198, (December 1992).
Handle: RePEc:nbr:nberwo:3046

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  1. Andrew B. Abel & Laurence J. Kotlikoff, 1988. "Does the Consumption of Different Age Groups Move Together? A New Nonparametric Test of Intergenerational Altruism," NBER Working Papers 2490, National Bureau of Economic Research, Inc.
  2. Robert M. Townsend, . "Risk and Insurance in Village India," University of Chicago - Population Research Center, Chicago - Population Research Center 91-3a, Chicago - Population Research Center.
  3. Bernheim, B Douglas & Bagwell, Kyle, 1988. "Is Everything Neutral?," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 96(2), pages 308-38, April.
  4. Browning, Martin & Deaton, Angus & Irish, Margaret, 1985. "A Profitable Approach to Labor Supply and Commodity Demands over the Life-Cycle," Econometrica, Econometric Society, Econometric Society, vol. 53(3), pages 503-43, May.
  5. Fumio Hayashi, 1985. "Tests for Liquidity Constraints: A Critical Survey," NBER Working Papers 1720, National Bureau of Economic Research, Inc.
  6. Barro, Robert J., 1974. "Are Government Bonds Net Wealth?," Scholarly Articles 3451399, Harvard University Department of Economics.
  7. Laurence J. Kotlikoff & Assaf Razin, 1988. "Making Bequests Without Spoiling Children: Bequests as an Implicit Optimal Tax Structure and the Possibility That Altruistic Bequests are not Equaliz," NBER Working Papers 2735, National Bureau of Economic Research, Inc.
  8. Laurence J. Kotlikoff, 1987. "Justifying Public Provision of Social Security," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 6(4), pages 674-696.
  9. David Altig & Steve J. Davis, 1989. "Altruism, borrowing constraints, and social security," Working Paper 8918, Federal Reserve Bank of Cleveland.
  10. Bruce, Neil & Waldman, Michael, 1990. "The Rotten-Kid Theorem Meets the Samaritan's Dilemma," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 105(1), pages 155-65, February.
  11. B. Douglas Bernheim, 1987. "Dissaving after Retirement: Testing the Pure Life Cycle Hypothesis," NBER Chapters, in: Issues in Pension Economics, pages 237-280 National Bureau of Economic Research, Inc.
  12. Neil Bruce & Michael Waldman, 1988. "Transfers in Kind: Why They Can Be Efficient and Non-Paternalistic," UCLA Economics Working Papers, UCLA Department of Economics 532, UCLA Department of Economics.
  13. Lindbeck, Assar & Weibull, Jorgen W, 1988. "Altruism and Time Consistency: The Economics of Fait Accompli," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 96(6), pages 1165-82, December.
  14. John H. Cochrane, 1988. "A Test of Consumption Insurance," NBER Working Papers 2642, National Bureau of Economic Research, Inc.
  15. Laurence J. Kotlikoff & Assaf Razin & Robert W. Rosenthal, 1988. "A Strategic Altruism Model In Which Ricardian Equivalence Does Not Hold," NBER Working Papers 2699, National Bureau of Economic Research, Inc.
  16. Blundell, Richard William, 1987. "Econometric Approaches to the Specification of Life-Cycle Labour Supply and Commodity Demand Behaviour," CEPR Discussion Papers, C.E.P.R. Discussion Papers 150, C.E.P.R. Discussion Papers.
  17. repec:fth:stanho:e-89-16 is not listed on IDEAS
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