Laurence J. Kotlikoff

Fumio Hayashi

Joseph G. Altonji

We use the 1988 PSID to study the effects of income and wealth on transfers of money and time between individuals and their parents as well as the effects of incomes of other relatives on these flows. We relate the relative incomes of parents and parents in-law to transfer amounts given and received by married couples. We also study how the relative incomes of divorced parents influence transfers. We find that money transfers tend to reduce inequality in household incomes and that time transfers are only weakly related to income differences. Richer siblings give more to parents and receive less. Among parents and parents in-law the richer set of parents is more likely to give money and less likely to receive money. The same is true of divorced parents. In contrast to the implications of simple exchange models of transfers, there is little evidence in the cross section or in the analysis using siblings that parental income or wealth raises time transfers from children or that time transfers are exchanged for money transfers. In the cross section and among siblings, the strong negative relationship between time transfers and distance from parents is not associated with a strong negative relationship between distance and money transfers. We discuss the implications of our results for alternative models of transfers.

The Effects of Income and Wealth on Time and Money Transfers Between Parents and Children

What is the basic economic decision-making unit? Is it the household or the extended family? This question is fundamental to economic analysis and policy design. The answer given by the Life Cycle and Keynesian models is that the economic unit is the household. According to these models, members of particular households act selfishly and do not fully share resources with extended family members in other households. Hence, altering the distribution of resources across households within the extended family will alter the consumption and labor supply of those households who acquire or lose resources. In contrast to the Life Cycle and Keynesian models, the altruism model implies that the extended family is the basic economic decision-making unit. According to this model the extended family is linked through altruism and, as a result, acts as if it fully shares resources. In the altruism model nondistortionary changes in the distribution of resources across households within the extended family will have no effect on the consumption or labor supply of any of its members. Despite its importance, the boundaries of economic decision-making units have not, to our knowledge, been examined directly with micro data. Stated differently, the altruism model has not been tested against the Life Cycle and Keynesian alternatives with such data. This paper uses matched data on parents and their adult children, contained in the Panel Study of Income Dynamics, to perform such a test. In essence our test asks whether the distribution of consumption and labor supply across households within the extended family depends on the distribution of resources across households within the extended family. Our findings provide quite strong evidence against the altruism model. The distribution of resources across households within the extended family is a highly significant (statistically and economically) determinant of the distribution of consumption within the extended family. This finding holds for the entire sample as well as the subsample consisting of rich parents and poor children. In addition to showing that the distribution of extended family resources matters for extended family consumption, we test the life cycle model by asking whether only own resources matter, i.e., whether the resources of extended family members have no affect on a household's consumption. Our results indicate that extended family member resources have, at most, a modest effect on household consumption after one has controlled for the fact that extended family resources help predict a household's own permanent income.

Direct Tests Using Micro Data

Is the Extended Family Altruistically Linked?

Thomas A. Dunn

Abstract: We measure the effects of parental education on the education profile of wages. The analysis uses sibling pairs from the Panel Study of Income Dynamics and the National Longitudinal Surveys of Labor Market Experience of Young Men and Young Women. We also use the variance across siblings in school characteristics to estimate the effects of school inputs on wages holding family background constant. We obtained mixed evidence on whether parental education raises the return to education. We find that teacher's salary, expenditures per pupil, and a composite index of school quality measures have a substantial positive effect on the wages of high school graduates.

The Effects of School and Family Characteristics on the Return to Education

We consider four models of consumption that differ with respect to efficient risk-sharing and altruism. They range from complete markets with altruism to family risk-sharing. We use a matched sample of parents and independent children available from the Panel Study of Income Dynamics to discriminate between the four models. Our testing procedure is designed to deal with the set of observed independent children being endogenously selected. The combined hypothesis of complete markets and altruism can be decisively rejected, while we fail to reject altruism and hence family risk-sharing for a subset of families.

Joseph G. Altonji

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