Academic journal article Economic Inquiry

Bequest Motives, Social Security, and Economic Growth

Academic journal article Economic Inquiry

Bequest Motives, Social Security, and Economic Growth

Article excerpt

JUNXI ZHANG [*]

This article conducts a systematic analysis of four bequest motives in a simple model of endogenous growth. It analyzes how bequest motives affect fertility savings, growth, and the effects of pay-as-you-go Social Security. It is found that altruistic and exchange motives give equivalent outcomes if the discount factors are set the same. The outcome under the joy-of-giving motive may involve a higher bequest ratio, higher saving, and better growth rates than that under altruism. If bequests are accidental, the equilibrium values will depend on the probability of survival. Moreover, the results provide testable implications on bequest motives. (JEL D1, D9, H55, J1)

I. INTRODUCTION

Although the importance of bequests in aggregate savings has been established by Kotlikoff and Summers (1981), who reported that 80% of U.S. household wealth is inherited wealth, what bequest motives lead to inheritance remains an unsolved problem. Yet it is well known that bequest motives have important implications for the behavior of financial markets, the macroeconomic impacts of fiscal policies, and the intergenerational transmission of inequality in the distribution of wealth.

At least four hypotheses for the existence of bequests have been discussed in the literature: (1) Bequests may arise from intergenerational altruism, that is, parents obtain utility from their heirs' utility as well as from their own consumption (Barro, 1974); (2) the prospect of bequests is used by parents to induce children to behave as desired by parents (Bernheim et al. 1985); (3) bequests may arise from the "joy of giving," that is, parents leave bequests simply because they obtain utility directly from the bequest (Yaari, 1964); [1] and (4) bequests may be the unintentional by-product of precautionary savings and a stochastic date of death in the absence of an annuity market (Abel, 1985). Following Barro (1974) and Becker (1974), the altruistic bequest motive has been used most frequently.

However, the enormous empirical work using micro data has not led to conclusive evidence. On the one hand, Bernheim et al. (1985), Cox (1987) and Cox and Rank (1992) show that bequests are more consistent with exchange than altruism. Altonji et al. (1992, 1997) also show that altruism is decisively rejected. Moreover, Wilhelm (1996) finds little support for an altruistic theory of bequests. On the other hand, a recent reexamination of the exchange motive by Perozek (1998) shows that the finding of Bernheim et al. is not robust. Laitner and Juster (1996) find some evidence of altruistic bequests. Therefore, a definite conclusion on bequest motives seems far from over. Indeed, though altruism has not been supported by most of those empirical studies, it remains a plausible hypothesis and continues to be used frequently (see, e.g., Coate [1995] and Davies and Zhang [1995]). Abel (1985) argues theoretically that although the simple life cycle model without bequest motives is an inadequate description of the savi ng behavior in the United States as found in Kotlikoff and Summers (1981), accidental bequests by selfish consumers can account for a sizable fraction of aggregate wealth. However, little formal empirical work has been done to test whether bequests are accidental or arise from joy of giving.

Given the lack of consensus on bequest motives, it is interesting to conduct a systematic theoretical analysis of different bequest motives in a particular context. Becker et al. (1990) and Caballe (1995) assume altruism in their models of economic growth, Wiedmer's (1996) analysis of Social Security and growth does not consider bequests. Except Ihori (1994), there seems to be no analysis of other bequest motives in the context of economic growth. The purpose of this article is to analyze how different bequest motives affect fertility, savings, and economic growth. The article will also examine how the effects of pay-as-you-go Social Security depend on bequest motives. …

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