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Testing Parental Altruism: Implications of a Dynamic Model

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  • Kathleen McGarry
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    Abstract

    Each year parents transfer a great deal of money to their adult children. While intuition might suggest that these transfers are altruistic and made out of concern for the well-being of the children, the fundamental prediction of the altruistic model has been decisively rejected in empirical tests. Specifically, the required derivative restriction-that an increase of one dollar in the income of the recipient, accompanied by a decrease of one dollar in the income of the donor, leads to a one dollar reduction in transfers-fails to hold. I show in this paper that in fact, this prediction will not hold if parents use observations on the current incomes of children to update their expectations about future incomes. This result implies that many past studies have relied on too restrictive a test, and furthermore, that our ability to distinguish empirically between altruistic and exchange behavior is severely limited. The paper also analyzes the variation in transfer behavior over time and finds substantial change across periods in recipiency status as well as strong correlation between inter vivos transfers and the transitory income of the recipient. This evidence suggest that dynamic models can provide insights into transfer behavior that are impossible to obtain in a static context.

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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7593.

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    Date of creation: Mar 2000
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    Handle: RePEc:nbr:nberwo:7593

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    Cited by:
    1. Audrey Light & Kathleen McGarry, 2003. "Why Parents Play Favorites: Explanations for Unequal Bequests," Working Papers 03-01, Ohio State University, Department of Economics.
    2. Stefan Hochguertel & Henry Ohlsson, 2009. "Compensatory inter vivos gifts," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 24(6), pages 993-1023.
    3. Charlene M Kalenkoski, 2002. "Parent-Child Bargaining, Parental Transfers, and the Postsecondary Education Decision," Working Papers 02-13, Center for Economic Studies, U.S. Census Bureau.
    4. Lina Walker, 2004. "Elderly Households and Housing Wealth: Do They Use It or Lose It?," Working Papers wp070, University of Michigan, Michigan Retirement Research Center.
    5. William G. Gale & Joel B. Slemrod, 2001. "Rethinking the Estate and Gift Tax: Overview," NBER Working Papers 8205, National Bureau of Economic Research, Inc.
    6. Paul Glewwe & Nisha Agrawal & David Dollar, 2004. "Economic Growth, Poverty, and Household Welfare in Vietnam," World Bank Publications, The World Bank, number 15010, January.
    7. Horrace, William C. & Oaxaca, Ronald L., 2006. "Results on the bias and inconsistency of ordinary least squares for the linear probability model," Economics Letters, Elsevier, vol. 90(3), pages 321-327, March.
    8. Ana Fernandes, 2011. "Altruism, labor supply and redistributive neutrality," Journal of Population Economics, Springer, vol. 24(4), pages 1443-1469, October.
    9. Elin Halvorsen & Thor Olav Thoresen, 2008. "Parents' Desire to Make Equal Inter Vivos Transfers," CESifo Working Paper Series 2468, CESifo Group Munich.
    10. Alessandro Balestrino & Lisa Grazzini & Annalisa Luporini, 2013. "A Normative Justification of Compulsory Education," Working Papers - Economics wp2013_18.rdf, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.
    11. Donald Cox, 2002. "Private Inter-household Transfers in Vietnam in the Early and Late 1990s," Boston College Working Papers in Economics 524, Boston College Department of Economics.
    12. Sumon K. Bhaumik, 2001. "Intergenerational transfers: the ignored role of time," MPIDR Working Papers WP-2001-008, Max Planck Institute for Demographic Research, Rostock, Germany.
    13. Jensen, Robert T., 2004. "Do private transfers 'displace' the benefits of public transfers? Evidence from South Africa," Journal of Public Economics, Elsevier, vol. 88(1-2), pages 89-112, January.

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