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Old-Age Income Support, Human Capital Investment, and Efficiency: Rotten-Kid Theorem Meets Samaritan's Dilemma

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Abstract

This paper studies the interaction between investment by parents in the human capital of their children and income support received by parents from them in their old age (reverse transfers). I find that reversetransfers lead to an inefficiently high level of human capital investment, when children choose reverse transfers non-cooperatively. The choice of human capital investment imposes a positive externality on parents. An increase in the human capital investment of a child not only increases transfers from him/her to parents, but also increases transfers from the other child. When children cooperate, this externality is internalized leading to efficient level of human capital investment. Old-age pension scheme financed by taxes on children can lead to efficient level of human capital investment by parents.

Suggested Citation

  • Alok Kumar, 2019. "Old-Age Income Support, Human Capital Investment, and Efficiency: Rotten-Kid Theorem Meets Samaritan's Dilemma," Department Discussion Papers 1902, Department of Economics, University of Victoria.
    • Handle: RePEc:vic:vicddp:1902
    Note: ISSN 1914-2838 JEL Classifications: J22, I20, D60
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    Keywords

    Human Capital Investment; Old-Age Income Support; Multiple Children; Positive Externality; Rotten-Kid Theorem; Samaritan’s Dilemma;
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