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Strategic transfers, redistributive fiscal policies, and family bonds: a micro-economic analysis

Abstract

This paper presents a micro-economic model to analyze intergenerational exchange in which the utility maximizing decisions of “selfish” children on family services, labor market activities, and leisure are determined endogenously. We show that altruistic parents’ financial transfers have a disincentive effect on the labor supply of their children and that the children’s equilibrium income is positively correlated with parental income. Based on the theoretical model, we find that redistributing US$1 from children to their parents increases parental transfers by less than US$1, implying that intergenerational public transfers are Ricardian non-neutral. However, the non-neutral redistributive transfers may enhance intergenerational family bonds because the equilibrium levels of services rendered by children to their parents increase.

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Notes

  1. Buchanan (1983) is the first in applying the notion of rent seeking within the family to characterize the behavior of sibling competition for parental transfers.

  2. See also the study by Chang and Weisman (2005).

  3. Becker (1988, p.11) remarks that “Family behavior is active, not passive, and endogenous, not exogenous.... A heightened awareness of the interaction between economic change and family choices will hasten the incorporation of family life into the mainstream of economics.”

  4. The result of non-neutrality in public transfers can also be found in Bernheim et al. (1985), Feldstein (1988), Kotlikoff et al. (1990), Altonji et al. (1977).

  5. With respect to possible elements that determine intergenerational transfers within the family, Cigno et al. (2006) rejects the hypotheses of altruistic and exchange motives. The authors further show that such intra-family transfers may be generated by self-enforcing family rules or norms.

  6. Becker (1993, p. 398) remarks that “most parents believe that the best example of selfish beneficiaries and altruistic benefactors is selfish children with altruistic parents.”

  7. Menchik and David (1983) and Bernheim (1991) use the Longitudinal Retirement Household Survey data and show empirically that financial wealth transfers or bequests are intrinsically intentional. Kohli and Künemund (2003) further indicate that “accidental” transfers or bequests are “not really motives per se in terms of purposeful action.”

  8. The additive form of the sharing rule in Eq. 1 has been widely employed to examine various issues such as those on rent-seeking and lobbying, tournaments and labor contracts, political conflict, war and peace, and sibling rivalry. See, e.g., Tullock (1980), Lazear and Rosen (1981), Hirshleifer (1989), Chang and Weisman (2005), and Garfinkel and Skaperdas (2007). Konrad (2007) presents a systematic review of applications in economics and other fields that use sharing rules similar to Eq. 1.

  9. Although the variable S i is defined as service time, it can be considered as a family-specific merit good that parents desire. That is, S i may be variously interpreted as frequency of parental visits, the level of care or attentions that children supply to their parents, etc. Pollak (1988) introduces the notion of “tied transfers” in that parental transfers are tied to a child’s consumption of particular goods or services that the parents value. As in Becker (1974), Bernheim et al. (1985), Cox (1987), Pollak (1988), Chami (1998), and Stark (1998), we consider family transfers and ignore human capital investment of children. The aim of our analysis is to characterize the behavior of adult children and their interactions with siblings and parents.

  10. In the income-maximization model of Chang and Weisman (2005) and Chang (2007, 2009), children are assumed to be risk neutral in allocating their time between providing services to their parents and working outside the family. The utility-maximization model developed in this paper further allows for children’s optimal demands for leisure.

  11. Once the equilibrium leisure and service allocations, {Z i , S i } are determined, the equilibrium amount of time allocated to work outside the family is given by L i  = (K − Z i  − S i ).

  12. An additively separable utility function has been widely adopted to analyze various issues such as the “rise and fall of families” (Becker and Tomes 1979, 1986), the economic analysis of fertility (Becker and Barro 1988), the biological origin of altruism (Mulligan 1997), residential choice of family members (Konrad et al. 2002), and sibling rivalry and parental transfers (Chang and Weisman 2005; Chang 2007, 2009).

  13. The specification in Eq. 14 assumes that there is a Hicksian composite good whose price is normalized to one.

  14. The SOC for an interior solution is satisfied since \(\partial^2\Lambda / \partial B^2=-[4(1+\tau )(n-1)n^2-\alpha_p ] /\) \((2n^3\emph{w})<0\).

  15. In the subsequent analysis, it will be shown that the qualitative findings continue to hold whether we make the assumption of altruism or selfishness. I thank the editor for drawing my attention to the notion of family constitution that may implicitly govern intergenerational transfers with or without altruism.

  16. Several contributions (e.g., Bernheim et al. 1985; Feldstein 1988; Kotlikoff et al. 1990; Altonji et al. 1977) cast doubt on the general applicability of Ricardian neutrality. See also discussions in Laferrère and Wolff (2006).

  17. This term is borrowed from Altonji et al. (1977).

  18. Becker (1993, p. 398) contends that a public policy involving an income redistribution between two generations may not affect the well-being of a family member. Bernheim et al. (1985) indicate that the neutrality effect does not hold for families with children-provided merit goods such as companionship or care. Note that in the purely altruistic transfer models of Becker (1974, 1981), children “have no decision-making authority and hence their preferences are assumed to have no bearing on economic outcomes” (Bergstrom and Bergstrom 1999, p. 47).

  19. Bergstrom (1989) is among the first to propose the use of a two-stage noncooperative Nash game to examine parent-child interactions within the family. Manski (2000) points out that the use of noncooperative game theory as a set of tools for the study of market and non-market interactions in microeconomics may be the “defining event of the late twentieth century” (p. 116). Manski further contends that the use of game theory has transformed labor economics from “a field narrowly concerned with work for pay into one broadly concerned with the production and distributional decisions of families and households” (p. 116).

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Acknowledgements

I thank Alessandro Cigno, the Editor, and two anonymous referees for valuable comments and suggestions. I also thank Isaac Ehrlich, Zijun Luo, and Shane Sanders for helpful comments on an earlier version of this paper. The usual caveat applies.

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Correspondence to Yang-Ming Chang.

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Responsible editor: Alessandro Cigno

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Chang, YM. Strategic transfers, redistributive fiscal policies, and family bonds: a micro-economic analysis. J Popul Econ 25, 1481–1502 (2012). https://doi.org/10.1007/s00148-011-0374-8

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Keywords

  • Altruistic transfers
  • Redistributive transfers
  • Family bonds

JEL Classification

  • D1
  • H31
  • D31