Academic journal article The American Journal of Economics and Sociology

Financial Transfers from Living Parents to Adult Children: Who Is Helped and Why?

Academic journal article The American Journal of Economics and Sociology

Financial Transfers from Living Parents to Adult Children: Who Is Helped and Why?

Article excerpt

I

Introduction

THE FAMILY IS THE KEY UNIT that makes decisions about how to invest in members' human capital and distribute resources between generations. Financial assistance from parents to adult children is the most prevalent of all potential money supports across generations, providing a direct way to transmit wealth to children (Gale and Scholz 1994; Lillard and Willis 1997). Parental financial transfers to children also influence the effectiveness of government redistribution policies (Barrow 1974; Becker 1974; Cox and Jakubson 1995; Rosenzweig and Wolpin 1993; Schoeni 1992) and inequality across generations (Becker and Tomes 1979; Menchik 1988; Tomes 1981; Wilhelm 1996). Family financial transfers are a significant counterstream to public intergenerational transfers such as Social Security. Population aging and the possibility of greater public transfers makes understanding private parent-to-child transfers more important. Social Security reform forecasts can benefit by considering how retired parents are likely to moderate future financial strains on their children through their decisions of which children to help and why (Kotlikoff and Summers 1981). For example, the efficiency of the proposed phasing out of the "pay-as-you-go" system depends on the accuracy of assumptions about child allowances and intergenerational transfers within families (Wigger 1999).

Money transfers to children are of two types--either as inter vivos transfers while the parent is alive, or as bequests. This article focuses on inter vivos transfers. Inter vivos assistance to children in the United States, like bequests, varies significantly across the population due to differences in parental resources, needs of children, family structure, situational differences, and cultural factors (Soldo and Hill 1993). Though parents are a critical source of financial support to young adult children, only data collected within the last two decades has begun to address limitations previously obscuring which children get assistance and why.

Past work has largely examined observed patterns of giving to infer parental motives for giving. The relationship between transfers and the recipient's income is at the forefront of a long-standing debate on the motivation behind such transfers. One theory hypothesizes an altruistic motive wherein donors care about the well-being of the potential recipients and hence try to maximize well-being among children (Barrow 1974; Becker 1974). The primary competing hypothesis argues that transfers are a form of exchange and represent payments to the recipient for the provision of services (Cox 1987).

One concern is that empirical work may have overemphasized income effects to infer parental motives for transfers (Cox 2003). Other determinants of transfers that are commonly measured, particularly demographic characteristics, have been given less attention, in part because existing theory provides little guidance on how to interpret their effects. Altruism and exchange explanations assume universal rather than heterogeneous motives and financial rather than non-financial effects. Altruism and exchange theories make no claims about the importance of many aspects of parent-child relationships that influence who receives and who does not, such as biological relatedness, the presence of grandchildren, emotional identification, and other bonds beside financial need.

This study extends research in three main ways. First, panel data both help minimize endogeneity and more accurately assess the extent to which children are given equal support over time. Most prior studies that examine transfers are limited by the cross-sectional nature of the data. Transfer measures over two time points minimize the extent to which circumstances unique to one time point might distort an assessment of whether children in a family receive equally. For instance, a child may receive more assistance in a given period if he or she had a child, purchased a home, recently moved away from home, or began college (Cooney and Uhlenberg 1992). …

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