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Family altruism and incentives

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  • Gatti, Roberta

Abstract

The author builds on the altruistic model of the family, to explore the strategic interaction between altruistic parents, and selfish children, when children's efforts are endogenous. If there is uncertainty about the amount of income the children will realize, and if parents have imperfect information, the children have an incentive to exert little effort, and to rely on their parent's altruistically motivated transfers. Because of this, parents face a tradeoff between the insurance that bequests implicitly provide their children, and the disincentive to work prompted by their altruism. The author shows that if parents can credibly commit to a pattern of transfers, they will choose not to compensate children in bad outcomes, as much as predicted by the standard (no uncertainty, no asymmetric information) dynastic model of the family. Alternatively, parents may choose to forgo any insurance, and offer a fixed level of bequest, to elicit greater effort from their children. The optimal transfers structure that the author derives, reconciles the predictions of the altruistic family model, with much of the existing evidence on inter-generational transfers, which suggests that parents compensate only partially, or not at all, for earnings differentials among their children. Moreover, the author shows that Ricardian equivalence holds in this setup, except when non-negativity constraints are binding.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2505.

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Date of creation: 31 Dec 2000
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Handle: RePEc:wbk:wbrwps:2505

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Keywords: Economic Theory&Research; Environmental Economics&Policies; Health Economics&Finance; Educational Sciences; Safety Nets and Transfers;

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Cited by:
  1. Ingela Alger & J�rgen W. Weibull, 2010. "Kinship, Incentives, and Evolution," American Economic Review, American Economic Association, vol. 100(4), pages 1725-58, September.
  2. Ana Fernandes, 2011. "Altruism, labor supply and redistributive neutrality," Journal of Population Economics, Springer, vol. 24(4), pages 1443-1469, October.
  3. Naiditch, Claire & Vranceanu, Radu, 2009. "Migrant wages, remittances and recipient labour supply in a moral hazard model," Economic Systems, Elsevier, vol. 33(1), pages 60-82, March.
  4. Ana Fernandes, 2000. "Altruism with Endogenous Labor Supply," Econometric Society World Congress 2000 Contributed Papers 0844, Econometric Society.
  5. Schüler, Dana, 2007. "Incentive Effects of Transfers within the Extended Family: The Case of Indonesia," Proceedings of the German Development Economics Conference, Göttingen 2007 29, Verein für Socialpolitik, Research Committee Development Economics.
  6. Gradstein, Mark, 2008. "Endogenous Reversals of Fortune," IZA Discussion Papers 3469, Institute for the Study of Labor (IZA).
  7. repec:hal:cesptp:halshs-00318870 is not listed on IDEAS
  8. G�nther Fink & Silvia Redaelli, 2005. "Understanding Bequest Motives An Empirical Analysis of Intergenerational Transfers," DNB Working Papers 042, Netherlands Central Bank, Research Department.
  9. Jellal, Mohamed, 2009. "Family Capitalism Corporate Governance Theory," MPRA Paper 17886, University Library of Munich, Germany.
  10. repec:hal:journl:halshs-00318870 is not listed on IDEAS
  11. Jellal, Mohamed, 2009. "A Theory of Educational Inequality Family and Agency Costs," MPRA Paper 17434, University Library of Munich, Germany.
  12. François-Charles Wolff, 2006. "Parental transfers and the labor supply of children," Journal of Population Economics, Springer, vol. 19(4), pages 853-877, October.

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