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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.

Suggested Citation

  • Gatti, Roberta, 2000. "Family altruism and incentives," Policy Research Working Paper Series 2505, The World Bank.
  • Handle: RePEc:wbk:wbrwps:2505
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    Cited by:

    1. Degan, Arianna & Thibault, Emmanuel, 2016. "Dynastic accumulation of wealth," Mathematical Social Sciences, Elsevier, vol. 81(C), pages 66-78.
    2. repec:hal:journl:halshs-00318870 is not listed on IDEAS
    3. Ingela Alger & Jörgen W. Weibull, 2010. "Kinship, Incentives, and Evolution," American Economic Review, American Economic Association, vol. 100(4), pages 1725-1758, September.
    4. Günther Fink & Silvia Redaelli, 2005. "Understanding Bequest Motives An Empirical Analysis of Intergenerational Transfers," DNB Working Papers 042, Netherlands Central Bank, Research Department.
    5. 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.
    6. Ana Fernandes, 2011. "Altruism, labor supply and redistributive neutrality," Journal of Population Economics, Springer;European Society for Population Economics, vol. 24(4), pages 1443-1469, October.
    7. Erlend Eide Bø & Elin Halvorsen & Thor Olav Thoresen, 2015. "Heterogeneity of the Carnegie Effect," CESifo Working Paper Series 5339, CESifo Group Munich.
    8. Leonardo Bursztyn & Lucas C. Coffman, 2012. "The Schooling Decision: Family Preferences, Intergenerational Conflict, and Moral Hazard in the Brazilian Favelas," Journal of Political Economy, University of Chicago Press, vol. 120(3), pages 359-397.
    9. François-Charles Wolff, 2006. "Parental transfers and the labor supply of children," Journal of Population Economics, Springer;European Society for Population Economics, vol. 19(4), pages 853-877, October.
    10. Jellal, Mohamed, 2009. "Family Capitalism Corporate Governance Theory," MPRA Paper 17886, University Library of Munich, Germany.
    11. James Berry, 2015. "Child Control in Education Decisions: An Evaluation of Targeted Incentives to Learn in India," Journal of Human Resources, University of Wisconsin Press, vol. 50(4), pages 1051-1080.
    12. 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.
    13. Fernandes, A., 2000. "Altruism with Endogenous Labor Supply," Papers 0002, Centro de Estudios Monetarios Y Financieros-.
    14. Jellal, Mohamed, 2009. "A Theory of Educational Inequality Family and Agency Costs," MPRA Paper 17434, University Library of Munich, Germany.
    15. Gradstein, Mark, 2008. "Endogenous Reversals of Fortune," IZA Discussion Papers 3469, Institute for the Study of Labor (IZA).
    16. Franziska Ziegelmeyer, 2010. "Elterliche Stellvertreterentscheidungen und frühkindliche Humankapitalbildung," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, vol. 79(3), pages 57-77.

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