Altruism and four shades of family relationships

We develop a model of the joint determination of education and health investments under four hypotheses of self-interest, filial altruism, parental altruism, and reciprocal altruism. Three-period-lived agents in our overlapping generations model optimally choose fractions of time devoted to investments in children’s education and old parents’ health. The agents with parental altruism spend the longest time in education, hence the economy’s growth rate is the highest among the four hypotheses. However, their life expectancy is predicted to be the second lowest. The agents with filial altruism invest in health the most and enjoy the longest lifespan. Under this hypothesis, the economy grows at the slowest rate because they substitute away from education investments. The self-interest and reciprocal altruism hypotheses yield the results with more balanced investments between the two kinds of human capital. The models are calibrated to fit Japanese economy to examine effects of an expansion of Pay-As-You-Go social security on the macroeconomy. We find that raises in the contribution rate make the economy grow faster but negatively affect life expectancy of old agents under all hypotheses. Social welfare increases by the expansion of social security under the hypotheses of self-interest, parental altruism, and reciprocal altruism but decreases under the hypothesis of filial altruism. Copyright Eurasia Business and Economics Society 2015