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Intergenerational Altruism and Transfers of Time and Money: A Life-cycle Perspective

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Abstract

Parental investments in children can take one of three broad forms: (1) Time investments during childhood and adolescence that aid child development, and in particular cognitive ability; (2) educational investments that improve school quality and hence educational outcomes; (3) cash investments in the form of inter vivos transfers and bequests. We develop a dynastic model of household decision-making with intergenerational altruism that nests a child production function, incorporates all three of these types of investments, and allows us to quantify their relative importance and estimate the strength of intergenerational altruism. Using British cohort data that follows individuals from birth to retirement, we find that around 40% of differences in average lifetime income by paternal education are explained by ability at age 7, around 40% by subsequent divergence in ability and different educational outcomes, and around 20% by inter vivos transfers and bequests received so far.

Key Findings

  • Preliminary analysis of the unique cohort data suggests that around 40 percent of differences in average lifetime income by paternal education are explained by ability at age 7, around 40 percent by subsequent divergence in ability and different educational outcomes, and around 20 percent by inter-vivos transfers and bequests received so far. These findings are supported by results from a simple version of the model that has been calibrated to match wealth and labour supply moments.
  • Using consumption equivalent variation to measure the welfare gains from higher-educated parents, we again find that differences in investments before and after the age of 7 are of roughly equal importance in determining lifetime utility differences between children of high- versus low-educated parents, with investments in ability and education looking much more important than differences in the level of inter-vivos transfers and bequests.
  • Looking in more detail at investments in ability, we find that higher levels of time investments increase ability, and that the ability production function looks to exhibit dynamic complementarity, at least at younger ages.
  • We present estimates of many of the investments that households make in their children, including time and money investments. We show that increased investment of time and goods of parents leads to higher ability children (as measured by test scores), and this higher ability leads to higher wages and incomes later in life.
  • We show that higher income parents invest more in their children, and that these investments can explain much of the difference in lifetime incomes of children across the parental education distribution.

Citation

Bolt, Uta, Eric French, Jamie Hentall Maccuish and Cormac O’Dea. 2018. “Intergenerational Altruism and Transfers of Time and Money: A Life-cycle Perspective.” Ann Arbor MI: University of Michigan Retirement Research Center (MRRC) Working Paper, WP 2018-379. https://mrdrc.isr.umich.edu/publications/papers/pdf/wp379.pdf

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Project

Paper ID

WP 2018-379

Publication Type

Working Paper

Publication Year

2018