Intrafamily Resource Allocation: Joint Determination of Multiple Transfer Outcomes.

Intrafamily Resource Allocation: Joint Determination of Multiple Transfer Outcomes.
Working paper number: 
98-04
Paper Abstract: 
Economists have found that intergenerational transfers of wealth influence the distribution of income and in the process of household wealth accumulation. Interest regarding the effect that government tax and transfer policies have on these wealth flows has inspired researchers to examine how parents distribute economic resources among their children. Research in this area has primarily focused on one of three types of transfers: cash transfers, bequests, or intergenerational coresidence. Recent literature on cash transfers has found that parents tend to give to their relatively poorer children more frequently and in larger amounts. In contrast, the literature on bequests has found that parents tend to divide their estates equally regardless of income differences between their children. The coresidence literature suggests that coresidence arrangements in the home of the parent are usually the result of the financial needs or circumstances of a child. While these analyses have provided information on the distribution of a single transfer type, they do not analyze the distribution of combinations of transfers. If relationships exist among transfer types, then receiving one type of transfer could have an influence on the likelihood of receiving other types of transfers. These relationships could determine the degree to which transfers to poorer children influence the wealth distribution. In this study, I jointly model five transfers (cash, coresidence, deeds, life insurance, and wills) to identify correlations among transfer types. This is accomplished by modeling ten bivariate probits of all pairwise transfer combinations. I find that significant linkages do exist between transfers and these relationships are complementary with the exception of cash and coresidence transfers, which are substitutes. The estimated parameters from the first stage are used to produce minimum-distance estimates of explanatory variables for each transfer equation. These estimates are used to simulate the probabilities of children receiving various “bundles” of transfers. I find that, holding all other characteristics of the sample constant, poorer children are more likely to receive “bundles” of all transfers (inter vivos and at-death) than relatively richer children in a family. I also find that poorer children are less likely not to receive any transfer from parents. The inter vivos component appears to drive the overall results. The targeting of inter vivos transfers to relatively poorer children in conjunction with positive linkages between inter vivos and at-death transfers makes the overall distribution of parental resources favor poorer children. A comparison of the results from the joint estimations with results from independent equation estimates shows that the independent estimates understate the probabilities of poorer children receiving all combinations of transfers.