Tied Transfers and Paternalistic Preferences

Abstract

Why do parents make inter vivos transfers to their children and leave them postmortem bequests?1 Gary Becker's notions of altruism (1981, ch. 8)-by which he means that children's utilities are arguments of their parents' utility function-provides one explanation. Denoting the children's utility functions by U'(ci), where ci denotes consumption by child i, the preferences of parents with two children can be represented by a utility function of the form W[cp, U1(c1), U2(c2)] where cp is the parents' own consumption.2 In the altruistic model, parents' sole motive for intergenerational transfers is to increase their children's utility. In models, however, parents may have nonaltruistic as well as altruistic motives for transferring resources to their children. The literature on economic development emphasizes old-age support as a motive for fertility and, to a lesser degree, as a motive for providing children with capital as part of an explicit or implicit intergenerational contract. When capital is the primary focus of the analysis, as in discussions of education and earnings, it is useful to decompose inter vivos transfers into human capital formation and other inter vivos Such a decomposition can mislead in discussing intergenerational transfers, however, because it obscures the fact that the provision of capital by parents constitutes an intergenerational transfer. Laurence Kotlikoff and Avia Spivak (1981) analyze another old-age support model, one in which the family operates as an incomplete annuities market. In their model, children make regular transfers to their aging parents, and the share that each child contributes to the parents determines his or her share of the parental estate. Although the prospect of old-age support may be an important motive for intergenerational transfers (i.e., from parents to in some societies, in the United States today upstream transfers appear too small and too uncertain to make this motive credible. To explain downstream transfers in the United States today, economists have investigated models in which parents have selfish as well as selfless motives. For example, B. Douglas Bernheim, Andrei Shleifer, and Lawrence Summers propose a model in which parents use the prospect of bequests to exact from their children: we envision a testator who, though altruistic, is also affected by actions taken individually by a number of potential beneficiaries (he may, e.g., enjoy receiving attention from his children) (1985, p. 1046). Bernheim et al. assume that such actions increase parents' utility and decrease children's utilities. In their model the children's utility functions become U1(ai, ci), where ai denotes the ith child provides the parents, and the parents' utility function becomes W[cp, al, a2, Ul(al, c1),U2(a2, cA]. To measure these services, Bernheim et al. use frequency of contact (i.e., visits plus telephone calls) between parents and children. This approach expands the concept of child to include those provided by adult children who live outside the parents' household in an attempt to explain bequests and inter vivos transfers. Child services originally appeared in discussions of fertility and the allocation of resources to young children living with their parents, and thus tends to evoke the joys of young parenthood *University of Pennsylvania, Philadelphia, PA 19104, and University of Washington. I am grateful to the National Science Foundation and the National Institutes of Health for financial support, to Gary Becker, Samuel Preston, David Stapleton, and Paul Taubman for helpful comments, and to Judith Farnbach for editonal assistance. 1 Even if bequests are unplanned, as some versions of the life cycle savings model assume, inter vivos transfers must be intentional. 21 ignore the possible dependence of the children's utility on their own children's utility, etc., because it is not relevant to the issues discussed in this paper.

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