Private Income Transfers and Market Incentives

The paper introduces labour supply considerations and labour earnings uncertainty into a parent–child framework in the presence of ‘merit goods’. I investigate the implications of various parental bequest rules on the effort decisions of the offspring, where the parent cannot perfectly observe her child’s market activities. The asymmetry in information and preferences gives rise to a moral hazard problem, and as a result the parent may not fully insure her child because the source of risk is not entirely exogenous. In this case, optimal parental transfers are shown to be state‐contingent. Moreover, the child’s effort is higher in the case with a merit good and parental transfers than in the case without a merit good. Goods are not only economic commodities but vehicles and instruments for realities of another order: influence, power, sympathy, status, emotion; and the skillful game of exchange consists of a complex totality of maneuvers, conscious or unconscious, in order to gain security and to fortify one’s self against risks incurred through alliances and rivalry. Levi‐Strauss, The Principle of Reciprocity