Beggar-thy-parents? A Lifecycle Model of Intergenerational Altruism

This paper constructs a life-cycle model with intergenerational linkages to study wealth transfers between parents and children. Households are subject to stochastic earnings, and parents care about their children. While the parents are of working age, the utility of the children’s consumption enters the utility of the parents. In addition, when they die, parents like to leave bequests to their children, and have an (exogenous) warm-glow utility from leaving a bequest. The paper studies how a borrowing constraint influences parental transfers. A tightening of borrowing constraints (that prevent children from borrowing to smooth their consumption) tends to generate larger inter vivos transfers early in life (relative to bequests). This matches the empirical evidence from Korea (a stricter constraints country) and the US. The paper also studies how transfers are impacted by allowing children to use parental wealth as collateral to borrow, and by different taxes. Borrowing constraints also have implications on the wealth distribution as a tighter borrowing constraint implies a drop in the Gini coefficient of wealth. JEL classification : D52, D91, E21