Family Altruism and Incentives
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 chil...
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2014
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2000/12/828301/family-altruism-incentives http://hdl.handle.net/10986/19740 |
| Summary: | 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. |
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