Academic journal article National Institute Economic Review

When to Give? a Note on the Timing of Gifts and Bequests

Academic journal article National Institute Economic Review

When to Give? a Note on the Timing of Gifts and Bequests

Article excerpt

We generalise the standard joy-of-giving bequest motive by including inter vivos gifts. Within a life-cycle framework, we analyse the implications of the choice of different discount factors for the utility of gifts and bequests. For a linear utility of giving, we characterise the gift and bequest pattern of a liquidity constrained individual over the life-cycle. We find that discounting at the interest rate is very convenient as the linear utility parameter can be interpreted as a summary measure for the strength of the motive of giving, net of all gift and bequest timing issues over the life-cycle.

Keywords: Consumer economics theory; social security and public pensions

I. Introduction

The literature on gifts and bequests can rightly be considered to be a rather extensive one. Interest in the subject stems from the wide variety of aspects that are involved. Among those, themes as diverse as the Ricardian equivalence argument of Barro (1974) and its importance for individual and collective savings behaviour (e.g., Drazen, 1978), gifts as a means of alleviating the consequences of binding credit constraints of young individuals, as well as the degree of annuitisation of retirement savings products, are just a few of the most outstanding themes that come to mind. All these reasons have interesting implications for the savings and thus also the optimal tax treatment of such intergenerational transfers. Cremer and Pestieau (2003) provide a comprehensive survey on the topic distinguishing the optimal tax structure depending on the type of motivation for wealth transfer.

The approach of these authors can be seen as a case in point of the wider treatment of such giving behaviour in the literature. While a lot of care is put into distinguishing the classical motives for bequeathing (altruism, joy-of-giving, exchange and accidental bequests), the treatment of inter vivos gifts as opposed to bequests remains rather vague and informal. Put a little differently, the literature seems to focus in a very careful manner on the one dimension characterising the different motivations for bequests, but very little emphasis is put onto the second dimension that determines when and how this motivation actually impacts the utility function of the individuals by means of either inter vivos gifts or bequests at death. Along the same lines, we observe that the literature has often focused on modelling strategies relying on functional forms that explicitly or implicitly render the integration of inter vivos gifts close to impossible.

When looking at the empirical literature, this general observation of a lack of attention to inter vivos gifts is reinforced. One reason for this is that data on inter vivos gifts are even harder to obtain than data on bequests. The purely private nature of most of such transactions, and the often special and fiscally privileged legal treatment of informal (cash) gifts can be seen as major impediments to truthful and complete information revelation. A second reason is that most models rely on theoretical models that do not or only insufficiently cover the entire spectrum of wealth transfers between generations. Therefore, it is not surprising that some empirical studies have found no or very weak empirical evidence of motivated bequests. Using the US Survey of Consumer Finances, Hendricks (2002) finds that at least half of the observed bequests in the US are accidental by nature. While such a finding may be interpreted as weak evidence of motives of giving, it may also partially simply be the logical consequence of the way bequest motives are modelled and the way data on inter vivos gifts are integrated.

The present note tries to shed some more light on these modelling issues. Our approach is to focus on a standard life-cycle model of consumption to include a joy-of-giving motive. Doing so, we explicitly focus our attention on only one motivation for giving but allow the timing to vary. …

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