Alumni Changing the World

Ctirad Slavík: “Dynamic Insurance and Equal Bequests”

Room 3, 2nd floor

Abstract:

This paper develops a dynamic insurance model to explain a puzzle in intergenerational transfers: parents partially compensate children for negative income shocks with gifts, but their bequests are typically divided equally. Gifts provide partial insurance while bequests provide none. We show that this pattern is optimal in a dynamic insurance model which takes the timing of these transfers seriously. A stylized version of the model exactly replicates the equal division puzzle, bequests are equal and gifts partially compensatory for a particular level of productivity persistence. We evaluate a richer version of the model quantitatively by selecting parameters to match the US income and wealth data. With productivity persistence pinned down by the data, we find that gifts are weakly compensatory and bequests are even less compensatory but not exactly equal in all families. We find that bequests in our model are much closer than in a pure altruism model and argue that bequests may be explained as a social norm or a simple rule-of-thumb behavior.