Parental Altruism under Imperfect Information: Theory and Evidence

Abstract

Can we reconcile the predictions of the altruism model of the family with the evidence on parental monetary transfers in the US? This paper provides a new assessment of this question. I expand the altruism model by introducing effort of the child and by relaxing the assumption of perfect information of the parent about the labor market opportunities of the child. First, I solve and simulate a model of altruism and labor supply under imperfect information. Second, I use cross-sectional data to test the following prediction of the model: Are parental transfers especially responsive to the income variations of children who are very attached to the labor market? The results of the analysis suggest that imperfect information accounts for many of the patterns of intergenerational transfers in the US.