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The Marginal Propensity to Spend on Adult Children

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  • Joseph G. Altonji
  • Ernesto Villanueva

Abstract

We examine how much of an extra dollar of parental lifetime resources will ultimately be passed on to adult children in the form of inter vivos transfers and bequests. We infer bequests from the stock of wealth late in life. We use mortality rates and age specific estimates of the response of transfers and wealth to permanent income to compute the expected present discounted values of these responses to permanent income. Our estimates imply that parents pass on between 2 and 3 cents out of an extra dollar of expected lifetime resources in bequests and about 2 cents in transfers. The estimates increase with parental income and are smaller for nonwhites. They imply that about 15 percent of the effect of parental income on lifetime resources of adult children is through transfers and bequests and about 85 percent is through the intergenerational correlation in earnings, although these estimates are sensitive to assumptions about the intergenerational earnings correlation, taxes, and the number of children. We compare our estimates to the implications of alternative computable benchmark models of savings behavior in order to assess the likely importance of intended bequests for the wealth/income relationship.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9811.

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Date of creation: Jul 2003
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Publication status: published as Altonji Joseph G & Villanueva Ernesto, 2007. "The Marginal Propensity to Spend on Adult Children," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 7(1), pages 1-52, February.
Handle: RePEc:nbr:nberwo:9811

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Citations

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Cited by:
  1. Fang Yang, 2006. "Consumption along the life cycle: how different is housing?," Working Papers 635, Federal Reserve Bank of Minneapolis.
  2. Justine S. Hastings & Ebonya L. Washington, 2008. "The First of the Month Effect: Consumer Behavior and Store Responses," NBER Working Papers 14578, National Bureau of Economic Research, Inc.
  3. Francisco Alvarez-Cuadrado & Ngo Van Long, 2008. "A Permanent Income Version of the Relative Income Hypothesis," CESifo Working Paper Series 2361, CESifo Group Munich.
  4. Fang (Annie) Yang, 2006. "Consumption Over Life Cycle: How Different is Housing?," Discussion Papers 06-01, University at Albany, SUNY, Department of Economics.
  5. Alvarez-Cuadrado, Francisco & Van Long, Ngo, 2011. "The relative income hypothesis," Journal of Economic Dynamics and Control, Elsevier, vol. 35(9), pages 1489-1501, September.
  6. Fang Yang, 2009. "Accounting for the Heterogeneity in Retirement Wealth," Working Papers, Center for Retirement Research at Boston College wp2009-6, Center for Retirement Research, revised Mar 2009.
  7. Alvarez-Cuadrado, Francisco & El-Attar, Mayssun, 2012. "Income Inequality and Saving," IZA Discussion Papers 7083, Institute for the Study of Labor (IZA).
  8. Fang Yang, 2012. "Social Security Reform with Impure Intergenerational Altruism," Discussion Papers 12-01, University at Albany, SUNY, Department of Economics.
  9. Marco Cagetti & Mariacristina De Nardi, 2005. "Wealth inequality: data and models," Working Paper Series WP-05-10, Federal Reserve Bank of Chicago.
  10. Francisco Alvarez-Cuadrado & Ngo Van Long, 2012. "Envy and Inequality," Scandinavian Journal of Economics, Wiley Blackwell, vol. 114(3), pages 949-973, 09.
  11. Ernesto Villanueva, 2005. "Inter vivos transfers and bequests in three OECD countries," Economic Policy, CEPR & CES & MSH, vol. 20(43), pages 505-565, 07.
  12. Fang Yang & Wenli Li, 2009. "Deconstructing Life-cycle Consumption with Home Production," 2009 Meeting Papers 670, Society for Economic Dynamics.

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