Testing Parental Altruism: Implications of a Dynamic Model

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. Specifically, the required derivative restriction–that an increase of one dollar in the income of the recipient, accompanied by a decrease of one dollar in the income of the donor, leads to a one dollar reduction in transfers–fails to hold. I show in this paper that in fact, this prediction will not hold if parents use observations on the current incomes of children to update their expectations about future incomes. This result implies that many past studies have relied on too restrictive a test, and furthermore, that our ability to distinguish empirically between altruistic and exchange behavior is severely limited. The paper also analyzes the variation in transfer behavior over time and finds 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.