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Blast from the past: The altruism model is richer than you think

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  • Barczyk, Daniel
  • Kredler, Matthias

Abstract

We provide the first full theoretical characterization of the standard two-period altruism model in a deterministic setting, thereby providing a coherent methodology for studying equilibria in this class of models. Under general conditions, policy and value functions are discontinuous; non-smoothness escalates one order higher than in one-player settings due to differing interests among players. We show that there exists a novel type of front-loaded transfer that enables the recipient to stay in autarky. The logic behind it challenges standard theory as it severs the link between transfer motives and first-order conditions. Our results revise qualitative predictions of dynamic altruism models and highlight that their computation demands global, not local, methods. Our results are robust to introducing income shocks and to varying assumptions on parent savings. Numerical experiments indicate that the correctly solved model features more front-loading of transfers than previously thought, accompanied by higher savings of transfer recipients.

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  • Barczyk, Daniel & Kredler, Matthias, 2021. "Blast from the past: The altruism model is richer than you think," Journal of Economic Theory, Elsevier, vol. 198(C).
    • Handle: RePEc:eee:jetheo:v:198:y:2021:i:c:s0022053121001927
    DOI: 10.1016/j.jet.2021.105375
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    Cited by:

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    2. Yang, Siqiang & Ripoll, Marla, 2023. "Financial transfers from parents to adult children," Journal of Economic Behavior & Organization, Elsevier, vol. 208(C), pages 286-303.

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    More about this item

    Keywords

    Consumption-saving decisions; Inter-vivos transfers; Altruism; Savings games; Non-smooth equilibria;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • D64 - Microeconomics - - Welfare Economics - - - Altruism; Philanthropy; Intergenerational Transfers
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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