Inter vivos transfers and intended bequests

Empirical work on intergenerational transfers has focused on distinguishing between altruistic and exchange motivated behavior. However, these two models are unable to explain the strong tendency far inter vivos transfers to be negatively related to the income of the recipient; while bequests bear no relationship to income. This paper presents a new framework for analyzing transfers from parents to children that is more consistent with observed behavior than are the altruistic and exchange models alone. In particular the model developed here predicts differing behavior with respect to inter vivos transfers and bequests due to liquidity constraints and uncertainty about the recipient's permanent income. The empirical work uses data from the Health and Retirement Study and the Asset and Health Dynamics Study. The patterns observed in these data are consistent with earlier findings that inter vivos transfers go disproportionately to less well-off children, while bequests are divided equally across children. Further, the results support the predictions of the model in that differences in inter vivos transfers arise from differences in current income, while differences in bequests result when indicators of the children's permanent incomes differ. (C) 1999 Elsevier Science S.A. All rights reserved.