Academic journal article The American Journal of Economics and Sociology

Motives for Intergenerational Transfers: New Test for Exchange

Academic journal article The American Journal of Economics and Sociology

Motives for Intergenerational Transfers: New Test for Exchange

Article excerpt

I

Introduction

What is the motive for private transfers? Is it altruism where the donor gives because he/she cares about the welfare of the recipients (Becker 1974), or is it an exchange motive, where the donor makes transfers in return for something (Bernheim, Shleifer, and Summers 1985), or is it both but one dominates another (Cox 1987)? This question of the motive for private transfers is not only an ideologically interesting one, but also one with important policy implications.

Private transfers are related to many important economic issues. They greatly determine capital accumulation and savings (Kotlikoff and Summers 1981; Modigliani 1988); they provide a mechanism through which inequality can either be passed on to other generations or be mitigated (Tomes 1981); they can function as "incomplete annuities," which help smooth life-cycle consumption and hedge against uncertainty (Kotlikoff and Spivak 1981, Morduch 1995).

The motive for private transfers affects the effectiveness of public transfer programs, such as Social Security, food stamps, welfare programs, and childcare subsidy for low-income families. Different motives of private transfers lead to different effectiveness of public transfer programs (Barro 1974; Becker 1974; Cox 1987; Rosenzweig and Wolpin 1994). Under an altruistic assumption, public transfers can be "neutralized" by private transfers because when there is a change in public transfers and thus the welfare of the recipients, the donors will reduce their transfers accordingly. In contrast, under the exchange assumption, the effects of public transfer programs cannot be easily offset by private transfers because a donor makes transfers in order to influence the actions of potential beneficiaries, and will not necessarily be affected by the change in public transfers.

Tests have been proposed for the motives of transfers, but researchers did not reach a consensus (Bernheim et al. 1985; Wilhelm 1996; Cox and Rank 1992; Sloan, Picone, and Hoerger 1997). The problem is further complicated by the fact that researchers do not always distinguish between two types of private transfers: bequests and inter-vivos transfers. Some research has shown that when the transfers are made in the form of bequests, they are more likely to be divided equally, but when the transfers are in the form of inter-vivos transfers, they are more likely to be divided unequally (Menchik 1980; Tomes 1981; Wilhelm 1996; McGarry and Schoeni 1995, 1997; Norton and van Houtven 2006). Few studies have investigated the difference of the motives for these two types of transfers in the same study. One exception is the work by Norton and van Houtven (2006), who find that the elderly parent's decision to make inter-vivos transfers, but not bequests, is positively associated with time transfers from adult children, and conclude that exchange motive plays a greater role in inter-vivos transfers but not in the way parents plan to leave bequests.

Another limitation of the literature is that few works separate the donor's motive from the recipient's motive. In the "exchange motive" models, both the donor and the recipient have to have exchange motives: the donor uses bequests to induce more attention and services from the recipient, and the recipient provides attention and services in exchange for bequests in the future. This assumption is easily challenged theoretically, but the challenge is how to separate the motive of the donor from that of the recipient empirically. For instance, when we observe a positive correlation between a parent's money transfers and a child's time transfers, it is difficult to conclude whether the parent makes the transfers in exchange for the child's time transfers or they are both altruistic in helping each other.

With these challenges, we propose to examine how a child's time transfers are affected by his/her own expectations of receiving financial transfers. …

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