Dynamic Aspects of Family Transfers
Kathleen McGarry (University of California - Los Angeles, Department of Economics)
Tuesday, 03-22-2011. ARCHIVED EVENT
Location: 6050 ISR Thompson St
Co-sponsored with the Survey Research Center
Each year parents transfer a great deal of money to their adult children. While intuition might suggest that these transfers are altruistic and made out of concern for the well-being of the children, the fundamental prediction of the altruistic model has been decisively rejected in empirical tests. Unfortunately, while the classic framework consists of a single period model the existing tests are typically implemented with cross-sectional data drawn from a dynamic world. In this paper develop a dynamic model of transfer behavior that allows parents to make transfers based on the expected future incomes of their children. The model demonstrates that standard predictions of the altruism model need not hold in a dynamic setting and thus that ability to distinguish empirically between altruistic and exchange behavior is severely limited. The paper also exploits transfer data from an extended panel to analyze the variation in transfer behavior over time. I find substantial change across periods in recipiency status as well as a strong correlation between inter vivos transfers and the transitory income of the recipient. This evidence suggests that dynamic models can provide insights into transfer behavior that are impossible to obtain in a static context.