A model of intergenerational transfers

Research output: Journal PublicationsJournal Article (refereed)Researchpeer-review

5 Citations (Scopus)

Abstract

Extending some existing literature, this paper formalizes the idea that intergenerational transfers occur because people care about the "characteristics" (i.e quantity and quality) of their offspring, rather than their children's welfare per se or consumption. The model analyzes this transfer motive in an infinite Markovian game framework, and it proves the existence of a stationary Markov Perfect equilibrium. Further, the analysis shows that under certain conditions, the proposed transfer motive will diminish, as the average income of an economy is sufficiently high. Thus, it suggests that as incomes continue to rise beyond a certain level, the (extended) life-cycle hypothesis will likely be a better and better approximation for explaining most people's saving behavior. This result also provides an explanation for the decline of the saving rates in the U.S. and other developed countries.
Original languageEnglish
Pages (from-to)399-418
Number of pages20
JournalEconomic Theory
Volume17
Issue number2
DOIs
Publication statusPublished - 1 Mar 2001

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Income
Intergenerational transfers
Markov perfect equilibrium
Infinite games
Developed countries
Life cycle hypothesis
Saving rate
Child welfare
Saving behavior
Approximation

Keywords

  • Intergenerational transfer
  • Life-cycle hypothesis
  • Markov perfect equilibrium

Cite this

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A model of intergenerational transfers. / FAN, Chengze, Simon.

In: Economic Theory, Vol. 17, No. 2, 01.03.2001, p. 399-418.

Research output: Journal PublicationsJournal Article (refereed)Researchpeer-review

TY - JOUR

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N2 - Extending some existing literature, this paper formalizes the idea that intergenerational transfers occur because people care about the "characteristics" (i.e quantity and quality) of their offspring, rather than their children's welfare per se or consumption. The model analyzes this transfer motive in an infinite Markovian game framework, and it proves the existence of a stationary Markov Perfect equilibrium. Further, the analysis shows that under certain conditions, the proposed transfer motive will diminish, as the average income of an economy is sufficiently high. Thus, it suggests that as incomes continue to rise beyond a certain level, the (extended) life-cycle hypothesis will likely be a better and better approximation for explaining most people's saving behavior. This result also provides an explanation for the decline of the saving rates in the U.S. and other developed countries.

AB - Extending some existing literature, this paper formalizes the idea that intergenerational transfers occur because people care about the "characteristics" (i.e quantity and quality) of their offspring, rather than their children's welfare per se or consumption. The model analyzes this transfer motive in an infinite Markovian game framework, and it proves the existence of a stationary Markov Perfect equilibrium. Further, the analysis shows that under certain conditions, the proposed transfer motive will diminish, as the average income of an economy is sufficiently high. Thus, it suggests that as incomes continue to rise beyond a certain level, the (extended) life-cycle hypothesis will likely be a better and better approximation for explaining most people's saving behavior. This result also provides an explanation for the decline of the saving rates in the U.S. and other developed countries.

KW - Intergenerational transfer

KW - Life-cycle hypothesis

KW - Markov perfect equilibrium

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