JMP Chu

Testing Parental Altruism: A Full Solution to a Dynamic Model of
Altruistic Transfers
Yu-Chi Chu∗
Job Market Paper
[Click here for most recent version]
November 27, 2019
Abstract
Are intergenerational transfers from parents to children motivated by altruism or exchange?
Previous work does not support the altruism hypothesis. Specifically, empirical studies have
tested the required derivative restriction of the altruism model — that redistributing one dollar
from a recipient child to donor parents leads to a one-dollar increase in transfers. Many papers
have estimated a small increase (less than 13 cents) and thus strongly reject altruism. This paper
shows that these empirical findings cannot be deemed as decisive evidence to reject altruism. I
achieve this in two steps. First, I revisit the canonical two-period model of altruistic transfers
and show that the solution method based on first-order conditions does not always deliver
the global maximum. Solving the model globally, I find that there are two transfer regions,
distinguished by whether children are constrained in equilibrium. The derivative restriction
holds in each region, however, mixing the two leads to biased estimates of the effects of parent
and child incomes on transfers. Second, to inspect the scale of such biasedness, I extend the
two-period model to a lifecycle economy where parents and children interact until parents die.
The model is calibrated to match the key micro moments of the sample of parent-child pairs
used to test altruism in Altonji, Hayashi, and Kotlikoff (1997). Using the model simulated
panel, I estimate the transfer responses to a one-dollar reduction of child income together with
a one-dollar increase of parent income, and find a 18-cents increase in transfers, which is not
far away from the empirical estimate. My finding suggests that altruism is still a reasonable
candidate to understand intergenerational transfers.
JEL Classification: D15; D64; E21

Keywords: altruism; transfer-income derivatives; non-cooperative game; consumption; lifecycle
∗
University of Wisconsin-Madison, email: yuchi.chu@wisc.edu. I would especially like to thank my advisor Ananth
Seshadri for his continuous supports and encouragements on this project. I am very grateful to my committee, Dean
Corbae and Randall Wright, for their invaluable comments. I also like to thank Anson Zhou, Rishabh Kirpalani,
Lones Smith, Corina Mommaerts, Meta Brown, Hal Cole, Simon Mongey, Ken Rogoff, Daniel Barczyk, Zhigang Ge,
Gary Backer, Eirik Brandsas, Rosemary Kaiser, as well as all the participants at the University of Wisconsin-Madison
mini conference, macro seminars, and student reading groups. All errors are mine.
1 Introduction
The Beckerian altruism — parents deem children’s utility as a normal good — has numerous
applications in economics. Classic examples include dynastic families and Ricardian equivalence
(Barro 1974), intergenerational transmissions of earnings (Becker and Tomes 1979, 1986), and
fertility choice (Barro and Becker 1989). There is also some recent work investigating the role
of altruistic parents in insuring children against potential labor market risks (Kaplan 2012; Boar
2017).
Despite widespread adoption of Beckerian altruism, most empirical studies reject the altruism
hypothesis. A commonly used test is to check the derivative restriction, a sharp prediction from
the altruism model — that conditional on positive transfers, the difference in the partial derivatives
of transfers with respect to a parent’s income and their child’s income equals one. In this paper, I
review the workhorse model of testing altruism based on inter vivos transfers. I demonstrate that
the first-order equation approach to solve this model does not always deliver the global maximum.
Characterizing a full solution leads to a possibility of reconciling the empirical estimates of the
difference in transfer-income derivatives and the predictions from the altruism model.
The model reviewed in this paper is developed by Altonji, Hayashi, and Kotlikoff (1997) (here-
after AHK). AHK considers a model where an altruistic parent and a child overlap for two periods
with three assumptions: continuous labor income risks, liquidity constraints, and no-commitment
— neither the parent nor the child can commit to future actions.1 In this model, the parent and
the child both make decisions in the first period about how much to save for the second period.
The parent also determines how much money to transfer to the child in each period. AHK demon-
strates that the model pins down the exact amounts of transfers in each period, and therefore, we
can map this model to data in current terms rather than in permanent terms as implied by a static
model. Further more, AHK shows that the derivative restriction holds in this dynamic setting.
Using data on inter vivos transfers from the Panel Study of income Dynamics (PSID), they find
that redistributing one dollar from a recipient child to donor parents leads to a less than 13-cent
1
The assumption of no-commitment distorts the child’s savings incentive since even if he over-spends and saves
little, his altruistic parent has an ex-post incentive to transfer more than what was “promised” last period. This
inefficiency is referred to as the Samaritan’s dilemma by Bernheim and Stark (1988) and Bruce and Waldman (1990).
1
increase in transfers, far less than the one-dollar increase implied by altruism.
I solve the model globally and find that on some values of the state space, the child with
first-period transfers is not liquidity-constrained. This is different from the established view —
that first-period transfers will be positive only if the child is liquidity-constrained. Why would the
parent transfer money to her child even though the child is unconstrained? There are two possible
cases and the equilibrium can take either of the two forms — whether the parent giving second-
period transfers is a zero-probability event. In the first case where the parent and the child interact
with an expectation that the second-period transfer is operative (positive) in some future states,
the child strategically squanders his first-period resources. By running down assets and acting poor,
the child can induce a larger second-period transfer. Therefore, the parent balances the need to
help him smooth consumption and the desire to restrict overconsumption. In this case, the optimal
solution of the first-period transfer is zero as long as the child is not liquidity-constrained. In the
other case, the parent chooses not to give second-period transfers even under the worst possible
income shock for the child, due to the child’s savings being sufficiently high. In the absence of
second-period transfers, the child saves efficiently but the parent has to give sufficiently large first-
period transfers to achieve this equilibrium outcome. The solution of first-period transfers flowing
to a child with positive savings reflects the parent’s decision in choosing the equilibrium path free of
the overconsumption problem. In other words, instead of refraining from giving transfers to restrict
overconsumption, some parents can do better by giving a large first-period transfer and eliminate
this inefficiency.
The idea of resolving the overconsumption problem by pre-committing to a large transfer is
first pointed out by Bruce and Waldman (1990) in a deterministic environment. Their result
is now extended to this stochastic environment where some parents give sufficiently large first-
period transfers (hereafter BW transfers) to make second-period transfers inoperative, and others
make first-period transfers (hereafter AHK transfers) to help the child intertemporally optimize.
The existing literature has not considered that it would be optimal for some parents to make
BW transfers in a stochastic environment. The intuition is that the gains from waiting for all
information to be revealed are sufficiently large so that delaying transfers is the best strategy for
parents unless the child is liquidity-constrained. One important step to prove this result is to solve
2
for the derivative of the child’s response function to the parent’s choices. It is standard to apply
the implicit function theorem and take a total derivative of the child’s unconstrained first-order
equation. However, the child’s unconstrained first-order equation, more precisely, the marginal
benefit of savings (hereafter MB) is not differentiable with respect to the child’s savings at the
cut-off point where receiving positive second-period transfers becomes a zero-probability event.
Therefore, this solution method is not applicable to solve this model.2
The intuition for non-differentiability is briefly summarized as follows. There are two channels
through which increasing the child’s savings affects MB. First, increasing the child’s savings implies
higher second-period consumption, which leads to a decrease in MB because of the decreasing
marginal utility. I refer to this mechanism as the consumption effect. Second, increasing the child’s
savings decreases the income threshold, which is defined as the maximum second-period income
for the child to receive second-period transfers. The presence of second-period transfers distort
the child’s incentives to save. Therefore, assets are of less value if his future income is below the
threshold compared to the case that his income is above the threshold. With fewer income states of
operative second-period transfers, MB increases. I refer to the second mechanism as the threshold
effect. These two effects do not always coexist. As the child accumulates more savings to the
level that receiving second-period transfers becomes a zero-probability event, the threshold effect
disappears. I show that the left limit of the slope of MB does not equal to the right limit at
this asset level. This asset level is exactly the equilibrium level of child assets if parents give BW
transfers.
I proceed to establish that in this two-period model, the derivative restriction holds conditional
on the transfer type. However, if the data contains both types of transfers, we are not able to
obtain the correct estimate of transfer-income derivatives. The reason is that the model generates
a non-monotonic relationship between transfers and parent’s incomes (child’s incomes) because of
the switch of equilibrium from one case to the other. Specifically, we may see a child with higher
current income receiving even more inter vivos transfers due to the switching in transfer types.
This positive relationship can lead to an upward biased estimate in the responsiveness of transfers
2
Thanks to the discussion with Daniel Barczyk, the first-order equation approach is applicable in a continuous
time setting.
3
to changes in the child’s income. A similar argument applies to the change in parent’s income,
but in the opposite direction. Estimates of the difference in transfer-income derivatives could be
significantly downward biased, depending on parameterization of the model.
Can the altruism model with the full solution reproduce the low empirical estimate of the
difference in transfer-income derivatives? I extend the two-period model to a lifecycle economy
with incomplete asset markets subject to a zero-borrowing constraint and calibrate it to the U.S. in
1988. The data moments of parent-child pairs are from the PSID 1988 — the same samples used to
test altruism in AHK. Besides the child’s income risks, I introduce parent’s mortality risks. In each
model period, a parent-child pair solves a stackelberg game and they interact until the parent dies.
The main parameters, time preference (0.97) and parental altruism (0.645), are determined from
matching the two sets of micro moments: the fraction of children receiving inter vivos transfers
by age; and the average assets among children with living parents by age. I simulate the model
to generate an artificial panel of incomes, assets and inter vivos transfers of parent-child pairs and
estimate the two transfer-income derivatives.
Results are summarized as follows. Among children who receive inter vivos transfers in this
artificial PSID panel, 74% of them are categorized as AHK type— transfers given to children
who are liquidity-constrained. This result is consistent with the finding in Cox (1990) that most
transfers flow to liquidity-constrained children. The model counterpart of the difference in transfer-
income derivatives is 0.18, not far away from the estimates in AHK which are concentrated in the
0.04 − 0.13 range. As expected, restricting transfers to AHK-type, the model implies a unitary
value of the difference in the transfer-income derivative. The presence of BW transfers, despite
their small share, is sufficient to bias the estimate. My result suggests that the low empirical value
of the difference in transfer-income derivatives may not be deemed as decisive evidence to reject
the altruism model.
This paper contributes to a long-standing debate over what is the main motive for intergen-
erational transfers. Two competing hypotheses are parental altruism and exchange. In the view
of Becker (1974), parents transfer money to their child out of altruism. Bernheim, Shleifer and
Summers (1985) gives an alternate view that transfers are made in exchange for child services such
as old age supports. The two views yield very different implications on the effectiveness of govern-
4
ment redistribution. In an altruistic framework, public transfer programs that redistribute incomes
between generation will be neutralized by private transfers. This is the Ricardian equivalence theo-
rem of Barro’s dynastic family (Barro 1974). However, if transfers are motivated by exchange, the
Ricardian equivalence conclusion will not hold (Bernheim et al. 1985).
Early research on distinguishing the two motives is limited to bequest behavior and the conclu-
sion is mixed.3 The literature then shifts to investigate inter vivos transfers and in general rejects
altruism. The pioneer work by Cox (1987) finds a positive relationship between the recipient child
income and the amount received, which rules out altruism but could be consistent with exchange.
Subsequent works have found that transfers are negatively related to child income and positively
related to parent income, which is consistent with the two transfer motives (McGarry and Schoeni
1995, 1997; AHK 1997; McGarry 2016). Yet, only the altruism model implies the derivative restric-
tion. A substantial number of studies have found a low value (around zero) of the difference in the
two transfer-income derivatives (Cox and Rank 1992; AHK 1997; Wolff 2000; Villanueva 2001).4
Such a low value has been interpreted as decisive evidence to reject altruism and support exchange
as the dominant motive for intergenerational transfers.
AHK advances understanding of this literature by resolving the indeterminacy issue of the tim-
ing of altruistic transfers in a dynamic model.5 The AHK model therefore has become the workhorse
framework to test altruism using data on inter vivos transfers. Efforts have been made to examine
the derivative restriction under different assumptions of the AHK model, such as incorporating
imperfect information (McGarry 2000) and endogenous child’s efforts (Villanueva 2001). My paper
shows that using the same AHK model but implementing the full solution, we can reconcile the
low empirical estimates of the difference in transfer-income derivatives with altruism. This result
implies that we should not settle the debate over whether altruism or exchange is the main motive
3
While Tomes (1981, 1987) has found evidence to support altruism that bequest is inversely related to recipient
income across families, other papers find no compensatory role of bequest because inheritance is shared equally among
siblings (Menchik 1988; Wilhelm 1996). Moreover, Bernheim et al. (1985) documents a positive relationship between
the bequest amount and the number of child visits, which is interpreted as evidence to support the exchange motive.
4
The only paper whose results are an exception is conducted by Raut and Tran (2004) on Indonesian data and
estimates a difference of 0.956.
5
Another important contribution AHK has made is that they invent a sophisticated econometric approach to
correct the selectivity bias arising from unobserved heterogeneity across families in the degree of altruism. The
selectivity bias is not an issue of the model we consider in this paper because parents are assumed to have the same
degree of altruism.
5
for intergenerational transfers, based on the current evidence we have.
The paper is organized as follows: Section 2 reviews the two-period model of altruistic inter vivos
transfers developed by AHK and characterizes a full solution. Section 3 discusses the application of
this model on testing altruism and examines the two transfer types in the PSID. Section 4 extends
the two-period model to a lifecycle economy and discusses identification. I simulate the model and
estimate the transfer-income derivatives. Section 5 concludes.
2 A Two-Period Model of Altruistic Inter Vivos Transfers

2.1 The Model
In this section, I review the two-period model of altruistic transfers in Altonji, Hayashi, and Kotlikoff
(1997, hereafter AHK). Consider a model in which a parent and her adult child overlap for two
periods. The parent is altruistic towards the child; the child is selfish in the sense that he cares
only about his own utility. Specifically, their value functions are
h i
V1P = u C1P + ηu C1K + βE u C2P + ηu C2K

h i
V1K = u C1K + βE u C2K ,

where u · is the period utility function satisfying u0 C > 0, u00 C < 0, and the Inada conditions.

Moreover, β is the discount factor, η is the weight the parent places on her child’s utility. In this
paper, I use P to represent the parent and K to represent the child.
We are solving sequential games in each period. The parent is a stackelberg leader, choosing
her CtP , APt+1 (savings), along with how much Gt dollars she would like to transfer to her child.
Because of the one-sided altruism assumption, the parent cannot request money from her child,
Gt ≥ 0. The child observes the parent’s choices, and then decides CtK and AK
t+1 . Information on
incomes and assets are known among family members. As in AHK, I assume that the parent does
not work in the second period and gets access to perfect credit markets; the child’s second-period
income, Y2K , is subject to a stochastic process with the income support 0, ∞ . The child cannot

borrow in the first period, AK

2 ≥ 0.
6
In the second period, the parent solves the following problem:
max u C2P + ηu C2K

(A1)
G2
s.t. C2P = (1 + r)AP2 − G2
C2K = (1 + r)AK K
2 + Y2 + G2
G2 ≥ 0.
The first order equation to determine G2 is
u0 C2P ≥ ηu0 C2K ,

(1)
where the inequality holds if G2 is a corner solution. The parent transfers money to equalize her
marginal utility of consumption with the child’s marginal utility of consumption scaled by η. There
exists a critical value Y (AP2 , AK
2 ) that if the child’s income is greater than or equal to this critical
value, G2 = 0. The optimal second-period transfer is summarized as follows:

(
ĝ such that u0 (1 + r)AP − ĝ = ηu0 (1 + r)AK + Y K + ĝ , if Y2K < Y (AP2 , AK
2 2 2 2 )
G2 (AP2 , AK
2 )=
0, if Y2K ≥ Y (AP2 , AK
2 ),
(2)
where Y (AP2 , AK 6
2 ) is solved from (2) by setting ĝ = 0. Due to the non-negativity constraint on G2
and the child’s income risks, the parent has incentives to delay giving transfers. By transferring
too much money in the first period, the parent exposes herself to a greater risk of not able to ask
for the money back from the child .
In the first period, I introduce a new notation X1K (and thus X1P ) to denote the sum of current
assets and current incomes, which is the total cash-on-hand before parents transfer money. I refer
to X1K and X1P as gross wealth in the first period. After observing the parent’s decisions in choosing
6
The existence of this income threshold comes from the property that ĝ, the optimal second-period transfer
K
without the constraint G2 ≥ 0, is strictly decreasing in Y2 . Using the implicit function theorem, we can obtain
00 K
−ηu C
∂ ĝ
= 00 K 200 P < 0 because u00 · < 0. Therefore, there exists a income threshold Y (AP K

∂Y K 2 , A2 ) that ĝ = 0,
2 ηu C2 +u C2
∀ Y2K ≥ Y (AP K
2 , A2 ).
7
G1 and AP2 , the child solves the following problem:
Z Y (AP ,AK )
2 2
K K P K
u (1 + r)AK K
f (Y2K |I1 )dY2K

V1 (X1 + G1 , A2 ) ≡ max u C1 + β 2 + Y2 + G 2
C1K ,AK
2 0
Z ∞
+β u (1 + r)AK
2 + Y2
K
f (Y2K |I1 )dY2K , (A2)
Y (AP K
2 ,A2 )
subject to
C1K = (1 + r)AK + Y1K +G1 − AK

| {z1 } 2
X1K
AK
2 ≥0
G2 (AP2 , AK P K
2 ) and Y (A2 , A2 ) are solved from problem (A1),
where I1 is available information in period 1 to forecast future earnings. Throughout this paper, I
use Et to denote the conditional expectation operator on the time t information set.
The transfer G1 affects the child’s decisions through changing his cash-on-hand; the parent’s
savings AP2 affect the child’s decisions because this determines the probability of receiving second-
period transfers and amounts received. The first order equation is
" #
∂G 2

u0 C1K − λ = βE1 u0 C2K 1 + r + 1{Y2K < Y (AP2 , AK

2 )} , (3)
∂AK 2
| {z }
(−)
where 1 is the indicator function, and λ is the Lagrange multiplier of the credit constraint. As seen
in (3), the second-period transfer responds negatively to the child’s savings, distorting the child’s
incentive to save. With operative second-period transfers, the child saves too little relative to what
his parent wishes him to do.
The parent, expecting the way the child would respond to her decisions, chooses C1P , AP2 and
G1 to maximize
(
V1P (X1P , X1K ) ≡ u C1P + ηV1K (X1K + G1 , AP2 )

max
C1P ,AP
2 ,G1
Z Y (AP K
2 ,A2 )
+β u (1 + r)AP2 − G2 f (Y2K |I1 )dY2K (A3)
0
)
Z ∞
P K K
+β u (1 + r)A2 f (Y2 |I1 )dY2 ,
Y (AP K
2 ,A2 )
8
subject to the following conditions:
C1P = (1 + r)AP1 + Y1P −G1 − AP2

| {z }
X1P
G1 ≥ 0
V1K (X1K + G1 , AP2 ), C1K (X1K + G1 , AP2 ), and AK K P

2 (X1 + G1 , A2 ) are solved from problem (A2)
G2 (AP2 , AK P K
2 ) and Y (A2 , A2 ) are solved from problem (A1).
The first order equations are

Z Y (AP K
2 ,A2 ) ∂G2 ∂AK
0 0
C1P C1K u0 C2P 2
f (Y2K |I1 )dY2K + λG = 0

−u + ηu −β K
(4)
0 ∂A2 ∂G1
and " #
∂G2 ∂AK

0 0
C1P (C2P ) K P K 2

−u + βE1 u (1 + r) − 1{Y2 < Y (A2 , A2 )} K = 0, (5)
∂A2 ∂AP2
where λG is the Lagrange multiplier of the non-negativity constraint on first-period transfers.
AHK shows that this model gives a stark prediction on the timing of transfers: the parent
chooses to make zero first-period transfers if the child is not liquidity-constrained when G1 = 0.
The child is not liquidity-constrained in the sense that λ = 0 in (3). AHK combines (3), (4), and
(5) with λ = 0 to show that λG > 0, which implies G1 = 0.
∂AK ∂AK
Two elements involved in proving this claim are 2
∂G1 and 2
∂AP
, which are the derivatives of the
2
child’s response function with respect to the parent’s choices. The standard method is to apply the
implicit function theorem and to take a total derivative of the child’s first-order equation. However,
equation (3), in the unconstrained case where λ = 0, is not differentiable with respect to AK
2 at
a certain point (which will be discussed later). Moreover, the problem (A2) may not be a convex
maximization problem.
9
10-3 10-3
5 5
Consumption Effect
The Marginal Benefit of Savings
The Marginal Benefit of Savings

4.5 4.5
Income Threshold Effect
4 4
3.5 3.5
3 3
2.5 2.5
2 2
1.5 1.5
1 1
0.5 0.5
0 0
0 5 10 15 20 25 30 35 40 0 5 10 15 20 25 30 35 40
Child Savings AK
2
Child Savings AK
2
(a) MB (b) MB: Decompose
Figure 1: Properties of The Marginal Benefit of Child’s Savings
2.2 Non Differentiability and Non Convexity
To illustrate, let’s rewrite the right-hand-side of the child’s euler equation (the marginal benefit of
savings, hereafter MB) as follows:
Z Y (AP K
2 ,A2 ) ∂G2
u0 C2K (1 + r + )f (Y2K |I1 )dY2K

MB = β
0 ∂AK
| {z2}
(−)
Z ∞
u0 C2K (1 + r)f (Y2K |I1 )dY2K ,

+β
Y (AP K
2 ,A2 )
where C2K = (1 + r)AK K K P

2 + Y2 + G2 1{Y2 < Y }. Notice that A2 is a state variable here because
when the child makes decisions, the parent has made their choices. The MB is not differentiable
with respect to AK
2 . Although this is a math property, I would like to discuss the economic intuition
behind this result.

There are two channels through which increasing AK
2 affects the MB. The first channel is the
consumption effect. With one additional unit of assets, the second-period consumption increases.7
7
Even though the parent makes less second-period transfers as the child’s asset increases, the net change of
consumption from saving more is still positive. To see this, we can apply the implicit function theorem and derive
∂ ĝ −(1+r)ηu00 (C2K )
∂AK
= ηu00 (C2K )+u00 (C2P )
> −(1 + r), where ĝ is the interior solution of the second-period transfer. Therefore,
2
∂C2K
∂AK
> 0.
2
10
The MB monotonically decreases with AK
2 due to diminishing marginal utility. The second channel
is through the change in Y (AP2 , AK

2 ), which is the maximum second-period income that the child
receives in transfers. With one additional unit of assets, the critical value Y falls. The fall in
this critical value implies that the parent becomes more reluctant to transfer money and the child
receives transfers in fewer income states. With fewer income states where G2 distorts the child’s
∂G2
savings (captured by the negative item ∂AK
), the MB increases. I refer to this positive effect as
2
the income threshold effect.8 The two effects do not always coexist. As the child accumulates more
savings to the level that Y decreases to zero, the income threshold effect disappears. Let’s define
AK∗ P K∗
2 such that Y (A2 , A2 ) = 0. This is the critical value that if the child saves more than or equal
to this level, receiving second-period transfers becomes a zero-probability event. The following
example shows that the MB is not differentiable with respect to AK K∗
2 at the point A2 .
c1−ρ
and log Y2K ∼ N (0, 1). Parameter values for this example are

Example. Assume u(c) = 1−ρ
ρ = 2, η = 0.3, r = 0.03, and AP2 = 28. From (1), we can derive Y (AP2 , AK
2 ) as
1
Y (AP2 , AK P K
2 ) = η (1 + r)A2 − (1 + r)A2 ,
ρ
1
and AK∗ P K∗
2 = η A2 . In the panel (a) of Figure 1, the MB is not differentiable at the point A2 =
ρ
(0.30.5 ) ∗ 28 = 15.33. The panel (b) of Figure 1 displays the MB as a function of AK

2 while holding
either the Y fixed (consumption effect) or the C2K fixed (income threshold effect). To the left of
AK∗ K∗
2 , both effects are in play; To the right of A2 , only the consumption effect is changing the
MB. Because of the drop of the income threshold effect at AK∗

2 , the MB is not differentiable at this
point. The formal proof and an analytical example of the MB are given in Appendix A.
I summarize the above discussions:
1. The derivative of the MB with respect to AK K∗

2 does not exist at the point A2 , which means
that the child’s first-order equation, even in an unconstrained case with λ = 0, is not differ-
∂AK
entiable. Therefore, we are not able to apply the implicit function theorem to solve for 2
∂G1
∂AK
and 2
∂AP
. In other words, the two derivatives do not exist.
2
8 ∂G2
The term ∂AK
is a constant number with homothetic preference. The proof of this property is in Appendix A.
2
11
2. If the income threshold effect dominates, the problem (A2) is not convex because the second-
order condition does not hold.
2.3 Two Types of Altruistic Transfers
The previous subsection points out the limitation of using first-order conditions and the implicit
function theorem to solve this model. Solving the model globally, I present a full solution. This
subsection revisits and revises the existing knowledge on the timing of transfers.
Table 1: A Summary of the Current View on the Timing of Transfers
Models with Perfect Credit Markets The Timing of Transfers Reference

With Commitment Indeterminate
Deterministic + No Commitment G1 ≥ 0, G2 = 0 Bruce and Waldman (1990)
Uncertainty + No Commitment G1 = 0, G2 ≥ 0 Altonji et al. (1997)
Table 1 summarizes the current view on the timing of transfers under perfect credit markets.
In a deterministic world without commitment, parents would make a sufficiently large first-period
transfer so that the second-period transfer is made inoperative. By doing so, children no longer have
incentives to under-save (Bruce and Waldman 1990, hereafter BW). In a stochastic environment,
however, parents would delay making transfers as long as possible in order to wait to observe the
child’s second-period income. Another reason for delaying transfers is to restrict the overconsump-
tion problem. This implies that the first-period transfer, if positive, is given to children who are
liquidity-constrained (AHK 1997). In Appendix A, I review the proof in AHK and discuss their
findings.
In the following, I adopt the grid search approach to solve the maximization problem and give
an example to show that the parent may give first-period transfers even though the child is not
liquidity-constrained. To visualize the global maximum on a 2-dimensional graph, I rewrite the
problem (A3) into a two-stage maximization problem.
12
The Second Stage:
Z Y (AP K
2 ,A2 )
Ṽ1P (X1K , M1 ) ≡ max ηV1K (X1K + G1 , AP2 ) +β u (1 + r)AP2 − G2 f (Y2K |I1 )dY2K
AP
2 ,G1 0
Z ∞
+β u (1 + r)AP2 f (Y2K |I1 )dY2K , (A4)
Y (AP K
2 ,A2 )
subject to the following conditions:
G1 + AP2 = M1
G1 ≥ 0
V1K (X1K + G1 , AP2 ), C1K (X1K + G1 , AP2 ), and AK K P

2 (X1 + G1 , A2 ) are solved from problem (A2)
G2 (AP2 , AK P K
2 ) and Y (A2 , A2 ) are solved from problem (A1).
The First Stage:

V1P (X1P , X1K ) ≡ max u C1P ) + Ṽ1P (X1K , M1 ), (A5)
C1P ,M1
subject to
M1 = X1P − C1P .
In problem (A5), the parent first decides how much to consume. Then in problem (A4), given
the money left after consumption, M1 , the parent decides how to allocate this amount between
first-period transfers and savings. Replacing AP2 with M1 − G1 , we can plot the parent’s value in
problem (A4) and the child’s savings as a function of G1 .
Figure 2 shows an example where AK K P
2 (X1 , M1 ) > 0, but G1 = 0 and A2 = M1 are not the
solution to problem (A4). For this parent-child pair, the parent transfers money to her child
even though the child is not liquidity-constrained at G1 = 0, a contradiction to the established
view. There are two subgames in this model but AHK restricts the solution to one subgame where
parent-child pairs interact with an expectation that G2 > 0 in some future states.9 With operative
second-period transfers, the child strategically squanders his first-period resources and thus the
best strategy for parents is to set G1 = 0, unless the child is liquidity-constrained. However, there
is another subgame that parent-child pairs anticipate, that G2 = 0 for all future income states. In
9
For each subgame, the first-order equation approach and implicit function theorem is applicable.
13
-0.15 12
G2 =0 for all future income states
-0.16
The Child Saving Function

Parent Objective Function
-0.17 10
-0.18 Local Max

-0.19 8
-0.2
6
-0.21
-0.22
4
-0.23
-0.24 2
-0.25 The child is unconstrained, A K
2
>0
0
0 1 2 3 4 5 6 7 8 9 10 0 1 2 3 4 5 6 7 8 9 10
First-Period Transfer G1 The First-Period Transfer G1
(a) The Parent’s Value in Problem (A4) (b) The Child’s Savings
Figure 2: An Example of Transfers Given to a Saving Child (BW Transfers)
-0.07 25
-0.075
20
-0.08
-0.085
Local Max = Global Max 15
-0.09
-0.095 10
-0.1
-0.105 5
-0.11
0
0 5 10 15 20 25 0 5 10 15 20 25
Figure 3: An Example of Transfers Given to a Constrained Child (AHK Transfers)
14
5 5
4.5 4.5
The First-Period Transfer G1

4 4
AHK-Type
3.5 3.5
3 3 AHK-Type
2.5 BW-Type 2.5
BW-Type
2 2
1.5 1.5
1 1
0.5 0.5
0 0
5 10 15 20 25 30 35 40 5 10 15 20 25 30 35 40
Child First-Period Gross Wealth XK

1
Parent First-Period Gross Wealth XP1
(a) Transfers as a Function of X1K (b) Transfers as a Function of X1P
Figure 4: The First-Period Transfer Function
the absence of G2 , the child consumes and saves efficiently but the parent has to give sufficiently
large transfers to achieve this equilibrium outcome. A jump in the child’s saving function in panel
(b) of Figure 2 displays a switch in the two subgames. Instead of refraining from giving first-period
transfers to restrict overconsumption problem (and wait for more information revealed), the parent
in this example can do better by giving a large transfer upfront and eliminate this inefficiency.
In a full solution of the model, there are two reasons for parents to make first-period transfers.
Some parents (such as in Figure 2) give first-period transfers to eliminate overconsumption problem.
Other parents (such as in Figure 3) give first-period transfers to help the child intertemporally
optimize. I subsequently refer the two types of transfers as BW transfers and AHK transfers,
respectively. Figure 4 displays the first-period transfer function. Relative to AHK transfers, BW
transfers appear in a region where children have relatively more gross wealth and parents have
relatively less gross wealth. One way to understand this result is to see that the BW transfer is a
sufficiently large transfer such that receiving G2 becomes a zero-probability event. This condition
is easier to be met among poor parent-rich child pairs. Another way to interpret this result is that
the child is more likely to be liquidity-constrained at G1 = 0 if the parent is rich and the child is
poor.10 Therefore, transfers between rich parent-poor child pairs are more likely to be categorized
10
Specifically, AK K P K P
1 (X1 , A2 ) increases with X1 and decreases with A2 . The child with a rich parent expects to
15
as AHK transfers.
3 Testing Parental Altruism
The main application of this model is to test parental altruism using data on inter vovs transfers.
The model pins down the timing of transfers, G1 and G2 separately, not just the present value of
transfers. The first-period transfer, G1 , is interpreted as an inter vivos transfer (a transfer made
from living parents). AHK tests altruism by examining the following prediction of the model,
known as the derivative restriction. Conditional on G1 > 0,
∂G1 ∂G1
− = 1. (6)
∂X1P ∂X1K
Empirical studies have measured the two derivatives and found that the difference is close to zero
rather than one as predicted from the equation (6). The most well-cited estimate is conducted
by AHK (1997) on the PSID data. They find that with regard to the child’s income, the transfer
derivative is −0.08, while it is 0.05 for the parent’s income. This leads to a difference of 0.13. The
low empirical estimate has been regarded as decisive evidence to reject the altruism hypothesis.
In this section, I re-examine the derivative restriction and the test of altruism in view of the full
solution of the model.
Equation (6) continues to hold with the full solution for the two types of transfers. The derivative
restriction is a robust prediction of the altruism model, which does not depend on the parameter
values or the form of the utility function. To see this, the variables X1P , X1K , and G1 in problem
(A2) and (A3) always appear in a form of X1P − G1 and X1K + G1 . Therefore, if we increase X1P
by and decrease X1K by , then G1 will increase by , and all other variables will be unchanged.
Exploit this observation and apply the implicit function theorem; it is easy to prove the derivative
restriction.11 The derivative restriction is also known as income pooling or the redistributive
neutrality property.12 Any policy that attempts to redistribute the parent’s income and the child’s
income will be neutralized by the change in private transfers.
receive more second-period transfers and thus borrow more to smooth consumption. Therefore, a child with a rich
parent is more likely to be credit-constrained in the first-period compared to a child with a poor parent.
11
This observation is pointed out by AHK, which greatly simplifies the proof. The implicit function theorem is
16
-0.19 -0.17
-0.2 -0.18

-0.19
-0.21
-0.2
-0.22
-0.21
-0.23
-0.22
-0.24
-0.23
-0.25
-0.24
-0.26 -0.25
-0.27 -0.26
0 1 2 3 4 5 6 7 8 9 10 0 1 2 3 4 5 6 7 8 9 10
First-Period Transfer G1 First-Period Transfer G1
(a) X1K = 5.32 (b) X1K = 7.69
Figure 5: An Example of a Richer Kid with More First-Period Transfers
3.1 Biased Estimates in Transfer-Income Derivatives
Although the full model solution still predicts the derivative restriction, we are not able to obtain
the correct estimates of the two transfer-income derivatives when the data contains the two transfer
types. Figure 5 shows that the transfer type (and thus the equilibrium path) changes from AHK to
BW as we increase X1K from the case (a) to the case (b). In this example, the child with more gross
wealth receives more first-period transfers. This implies that if the data contains the two transfer
types, we may overestimate the responsiveness of transfers to changes in the child’s income. Similar
statements can be applied to the estimate with regard to the change in parent’s incomes. In light
of the previous discussion, it seems that we could reconcile the low empirical estimate with the
altruism model — the same model but implementing the full solution.
To see this, I randomly draw X1P and X1K from a uniform distribution U 0.0001, 40 and generate

the transfer data according to the first-period transfer function, G1 (X1P , X1K ). I run the following
applicable for each subgame. The proof of derivative restriction is described in Appendix A.
12
Laferrere and Wolff (2006) discusses why altruism implies the redistribution property and the Ricardian equiv-
alence result in a chapter of their handbook on the economics on giving, reciprocity and altruism. My conjecture is
that the Ricardian equivalence result may fail in this model because the welfare of the two type of transfers (and
thus the two equilibrium paths) may be different. This is beyond the scope of this paper and is left for future work.
17
5 6
4.5 Prediction Line from Tobit Regression Prediction Line from Tobit Regression

5
4
3.5
4
3
2.5 3
2
2
1.5
1
1
0.5
0 0
5 10 15 20 25 30 35 40 5 10 15 20 25 30 35 40

1
Parent First-Period Gross Wealth XP1
(a) Transfers as a Function of X1K (b) Transfers as a Function of X1P
Figure 6: G1 (X1P , X1K ) versus Ĝ1 (X1P , X1K )
Tobit regression:
G∗1,i = a0 + bp X1,i
P K
+ bk X1,i + i ,
where G∗1 is the latent variable of transfers. The two coefficients, bp and bk , are interpreted as the
effects of parent’s and child’s gross wealth (the sum of assets and current incomes) on transfers.
If there is no heterogeneity in how much parents care about children (every parent is assumed to
∂G1
have the same altruism parameter η), the literature treats b̂p and b̂k as unbiased estimates of ∂X1P
∂G1
and ∂X1K
. The predicted transfer amount from the Tobit regression is

Ĝ1 (X1P , X1K ) = max â0 + b̂p X1P + b̂k X1K , 0 .
Figure 6 compares Ĝ1 (X1P , X1K ) with G1 (X1P , X1K ). In this example, b̂p − b̂k < 1. To see this, in
panel (a) of Figure 6, the slope of the dotted line (b̂k ) is greater than the slope of the BW transfer
to child’s income. And in panel (b) of Figure 6, the slope of the dotted line (b̂p ) is smaller than the
slope of the BW transfer to parent’s income. This observation implies that
∂G1 ∂G1
b̂p − b̂k < BW-Type P
− BW-Type = 1.
∂X1 ∂X1K
Once we separate the two types of transfer and run the same Tobit regression, we would obtain
b̂p − b̂k close to one. Table 2 summarizes the above findings. Because there are two types of
transfers, the estimated value of bp − bk from the model generated data is less than one.
18
Table 2: Effects of The Parent’s And Child’s Income On Transfers
(1) (2) (3)

Transfers BW Transfers AHK Transfers
model
Xk -0.284∗∗∗ -0.623∗∗∗ -0.819∗∗∗
(-25.90) (-167.56) (-405.61)
Xp 0.202∗∗∗ 0.378∗∗∗ 0.180∗∗∗

(27.11) (160.34) (530.44)
cons -1.089∗∗∗ -0.253∗∗∗ 0.282∗∗∗

(-6.08) (-5.70) (34.72)
sigma
cons 1.437∗∗∗ 0.121∗∗∗ 0.0477∗∗∗
(24.86) (15.26) (19.82)
N 1000 779 221
t statistics in parentheses
∗ ∗∗ ∗∗∗
p < 0.05, p < 0.01, p < 0.001
1−ρ
Note.— Assume u(c) = c1−ρ and log Y2K ∼ N (0, 1). Parameter values for this example are ρ = 2,

1
η = 0.3, r = 0.03, and β = 1+r . X1P and X1K are randomly drawn from a uniform distribution
U [0.0001, 40]. Transfers are generated from the first-period transfer function G1 (X1P , X1K ). The
AHK transfer is defined as the transfer given to constrained children (AK 2 = 0); and the BW
transfer is defined as the transfer given to children with positive savings (AK
2 > 0).
3.2 Two Types of Altruistic Transfers in the PSID
The previous subsection points out a potential problem of testing altruism from mixing the two
transfer types. In the following, I investigate the relevance of the two transfer types using data from
1988 Panel Study of Income Dynamics, which includes a supplemental survey on time and money
transfers between relatives. Using the same criterion of sample selection as in AHK, the effective
sample consists of 3,356 parent-child pairs, including 673 pairs with positive transfers. Appendix
B contains descriptions of sample selection and summary statistics of the effective sample.
Based on the two-period model, we can distinguish the two types of transfers by equilibrium
outcomes: The AHK child recipients are liquidity-constrained (AK
2 = 0) and expect to receive the
19
50000 40000
Parental transfer in 1988($)
10000 20000 030000
−1000 −500 0 500 1000

Wealth (with home equility) in 1989 (1000$)
Figure 7: A Scatter Plot between Transfers in 1988 and Child’ Wealth in 1989
second-period transfers in low future income states. The BW child recipients save (AK
2 > 0) and
G2 = 0 for all future income states. Figure 7 displays a scatter plot of parental transfers in 1988 and
child wealth (with home equity) in 1989, which can be interpreted as a scatter plot of G1 and AK
2 .
Excluding home equity from the definition of net worth produces a similar pattern. The scatter
dots near the red vertical line are more likely to be categorized as AHK transfers while the rest are
BW transfers. Both styles of transfers seem to be relevant in the PSID. The observation that most
scatter dots are around the red vertical line implies that most transfers flow to liquidity-constrained
children, which is consistent with the finding in Cox (1990).
Are inter vivos transfers motivated by parental altruism? The consensus view in the literature
is no. It is worth revisiting this question because the low empirical estimate of transfer-income
derivatives may come from the problem of mixing the two transfer types in the data. There are two
approaches to answer this question. First, one can split transfers in the PSID into AHK transfers
and BW transfers and test whether the derivative restriction holds for each group (such as the
exercise in Table 2). Second, we can rely on a calibrated structural model, simulate an artificial
20
panel of incomes, assets, and inter vivos transfers of parent-child pairs, and compare the model
prediction of the difference in estimates of the two transfer-income derivatives with the empirical
counterpart. This paper focuses on the structural approach for the following reasons. First, there
is no straightforward rule to tell if the child is credit-constrained in the data. Second, the above
analysis is restricted to a two-period model. In a multi-period model, the kink problem propagates
back in time and causes secondary kinks, resulting in more transfer regions (more subgames). As the
number of transfer regions grows, it is more difficult to categorize transfers into the right group.13
Last but not least, a structural model using micro statistics helps us identify the degree of parental
altruism. This value is important in interpreting the effectiveness of government redistribution
policies.
4 A Lifecycle Model of Altruistic Inter Vivos Transfers

4.1 The Economy
In this subsection, I describe the model environment. I take the lifecycle model of precautionary
saving in Carroll (1997) as the benchmark model. Then, in each model period, I embed the
stackelberg game between parent-child pairs as described in section 2. Once we shut down altruism
(η = 0), the model goes back to Carroll’s model.
Preference.
C 1−ρ
u C = .
1−ρ
Demographics. Time is discrete. Each model period represents a year. The child enters at age
23 and the parent enters at age 53. Both family members work until they reach the retirement age
of 60. The parent is subject to a mortality risk ξt and dies with certainty at age 90. At the time
of the parent’s death td , any remaining assets of the parent are given to the child as bequests and
the continuation value of the deceased parent is
VtPd = ηVtK
d
.
13
Iskhakov et al. (2017) gives a clear illustration of how the primary kinks propagate back in time and accumulate
more secondary kinks in the value functions in earlier periods.
21
I close the model at T = 38. Since the child is alive at the terminal period, I assume the following
continuation value: 1−ρ
AK
T +1
WTK+1 AK

T +1 =φ . (7)
1−ρ
Income Process. The current labor income, Y , consists of a permanent component Z and a
transitory component U . This is the income process considered in Carroll’s model but without
unemployment. Specifically,
Yti = Zti Uti
Zti = Γit Zt−1

i
Nti (8)
for i ∈ P, K , where Γit is a deterministic experience profile. For simplicity, I assume that the

parent’s income evolves deterministically (UtP = NtP = 1). At retirement, the income drops to 70
percent of the pre-retirement level and remains constant thereafter. This is a reduced form way to
capture the social security benefits and other incomes in the retirement periods. The child draws
transitory shock U and permanent shock N according to log Ut ∼ N (0, σu2 ) and log Nt ∼ N (0, σn2 ).
Gross Wealth. The equilibrium policy functions are defined on gross wealth (total current
resources before parents transfer money in that year), denoted by Xt . The parent’s and the child’s
gross wealth are given by
XtP = (1 + r)APt + YtP
XtK = (1 + r)AK K
t + Yt . (9)
Credit Constraints. The parent and the child are subject to credit constraints: APt+1 ≥ 0, and
AK
t+1 ≥ 0. It is worth noting that the constraint does not bind among children without parents. In
a single household model, the assumption that income could go to zero guarantees that the credit
constraint never binds (Zeldes 1989; Carroll 1997). The scenario of zero income, if it happens,
together with no savings, leads to zero consumption. Therefore, individuals will never choose to
borrow to ensure that consumption remains strictly positive. However, with inter vivos transfers
or bequests, the child is precluded from the above zero consumption scenario. The living parent
will always make transfers to lift her child’s consumption above zero. The child whose parent dies
22
in that period receives what remains of the parent’s assets. Therefore, the child’s credit constraint
could bind among children with living parents.
Now we define the problem recursively. At time t after permanent income shocks and transitory
shocks are realized, the child without a living parent (indexed by S) solves a single household
problem:
h i
VtS XtS , ZtS = max u CtS + βEt Vt+1
S S S

Xt+1 , Zt+1 (B1)
CtS ,AS
t+1
s.t. CtS = XtS − ASt+1
ASt+1 ≥ 0.
The child with a living parent observes the parent’s choices and solves
ṼtK XtK + Gt , APt+1 , ZtP , ZtK = max u CtK + βWt+1

K
APt+1 , AK P K

t+1 , Zt , Zt (B2)
CtK ,AK
t+1
s.t. CtK = XtK + Gt − AK

t+1
AK
t+1 ≥ 0.
The parent’s problem is
VtP XtP , XtK , ZtP , ZtK = u CtP + ηu C̃tK + βWt+1

P
APt+1 , ÃK P K

max t+1 , Zt , Zt (B3)
CtP ,AP
t+1 ,Gt
s.t. CtP = XtP − Gt − APt+1
APt+1 ≥ 0, Gt ≥ 0
C̃tK , ÃK
t+1 are solved from problem (B2)
Given the parent’s policy functions, Gt (XtP , XtK , ZtP , ZtK ≡ G∗ and APt+1 (XtP , XtK , ZtP , ZtK ≡

A∗ , we obtain the following equilibrium value function and policy function for the child:
VtK XtP , XtK , ZtP , ZtK = ṼtK XtK + G∗ , A∗ , ZtP , ZtK

CtK XtP , XtK , ZtP , ZtK = C̃tK XtK + G∗ , A∗ , ZtP , ZtK

∗ ∗
AK P K P K
= ÃK K P K

t+1 Xt , Xt , Zt , Zt t+1 Xt + G , A , Zt , Zt .
23
Finally, we compute the expected value functions (before mortality risk and income shocks are
realized) as follows:
h i
WtP APt , AK P K S K P K P P K P K

t , Zt−1 , Zt−1 = Et−1 tξ ηV t X t + A t , Z t ) + (1 − ξ )V
t t X t , X t , Z t , Z t
h i
WtK APt , AK P K S K P K K P K P K

t , Zt−1 , Zt−1 = E ξ
t−1 t tV Xt + A t , Z t ) + (1 − ξ )V
t t Xt , X t , Z t , Z t ,
P and Z K are state variables used to predict future incomes. I apply a numerical integral
where Zt−1 t−1
to solve the expectation.14

Carroll demonstrates that the single household problem can be rewritten by dividing through all
variables by the level of permanent income and thus reduce the number of state variables. Define
lowercase variables as the uppercase variable divided by the current level of child’s permanent
XtK CtP
income, e.g. xK
t = ZtK
; cPt = ZtK
. For example, we can rewrite the problem (B1) to be defined on
a single state variable: xK
t . In Appendix C, I demonstrate that this methodology can be applied
to problem (B2) and (B3) and describe the method of numerical solution.
4.2 Calibration
I first discuss parameters calibrated outside of the model.

External Parameters
Demographics. The model period is one year. The survival rates ξt are obtained from Table 1
in National Vital Statistics Reports (2003).
Interest Rate. I set r = 3%, the same value assumed in Kaplan and Violante (2010).
Income Process. The deterministic wage-age profile, Γt is estimated using PSID data from 1969
to 2017 waves. I apply the same empirical analysis and selection rule as Huggett et al. (2011). The
time effect is controlled. All earnings are adjusted to 1988 dollars. I set the variance of permanent
shocks to be 0.01 and the variance of transitory shocks to be 0.05, the same values estimated in
Kaplan and Violante (2010).
Initial Distribution. There are four random variables: initial parent assets (AP0 ), initial child
assets (AK P K
0 ) , initial parent permanent incomes (Z0 ), and initial child permanent incomes (Z0 ).
14
There are two concerns for choosing numerical integral over the standard discrete markov process. First, in
AHK’s paper, the child’s income shock is defined on a continuous support. Second, I want to emphasize the kink
problem in this model does not come from the non convexity of the child’s budget set due to the parent’s choices on
whether to give transfers, which should have been smoothed out if adding sufficient randomness.
24
The following parametric assumptions capture the correlation between assets, earnings and inter-
generational earning transmission:
2 2 σ2
!
log Z0P

µzp σzp ρpk σzp zk
∼N ,
log Z0K µzk 2 σ2
ρpk σzp zk
2
σzk
AP
! !
2 2 σ2

log Z P0 µrp σrp ρrpzp σrp zp
0 ∼N , 2 σ2 2
log Z0P µzp ρrpzp σrp zp σzp
AK
! !
2 2 σ2

log Z K
0
µrk σrk ρrkzk σrk zk
0 ∼N , 2 σ2 2 .
log Z0K µzk ρrkzk σrk zk σ zk
In the PSID, there is a non-trivial fraction of young adults with negative net worth. To capture
this fact, I assume that a child enters the model with zero net worth with probability p0 , which is
calibrated to the empirical fraction of adults less than age 25 with zero or negative net worth. I
set the intergenerational transmission, ρzp = 0.4, according to the estimated value in Solon (1992).
The other parameters of the initial distribution are estimated based on the PSID 1969-2017 data,
which contains information on earnings and net worth.15 In each survey year, I interpret individuals
between age 50 and 56 as parents entering the model, and individuals between age 20 and 26 as
children entering the model. I control for time fixed-effect. Values of earnings and assets are
adjusted to 1988 dollars. Table 3 summarizes parameters of the initial distribution.
Internal Parameters
There are four internally calibrated parameters: the degree of altruism (η), the time preference
discount rate (β), the coefficient of risk aversion (ρ), and the child’s terminal value (φ).
The four parameters, Ω = (η, β, ρ, φ), are solved from the minimization problem below:
5
!
h Frac Ω − Frac i2 h AK Ω − AK i2
X J J J J
min + ,
AK

Ω
J=1
FracJ Ω J Ω
where FracJ denotes the fraction of children receiving inter vivos transfers and AK
J denotes the
mean assets of children with living parents by each age bin J. Table 4 summarizes the moments
calculated from the PSID. Together, I use 10 moments to determine 4 parameters.
15
Net worth is defined as total assets (including home equity) net of total debts. Information on net worth was
collected in the PSID in the following waves: 1984, 1989, 1994, 1999, 2001, 2003, 2005, 2007, 2009, 2011, and 2013.
25
Table 3: Parameters of the Initial Distribution
Parameters Value
µzp 10.25
µzk 9.58
2
σzp 0.3335
2
σzk 0.4695
ρpk 0.40
µrp 0.8567
µrk −0.6581
2
σrp 2.3716
2
σrk 2.3689
ρrpzp 0.1325
ρrkzk −0.0920
p0 0.370
Table 4: Summary Statistics of the PSID 1988 Sample of Parent-Child Pairs
Average Average Average

Child Age Transfer > 0 Transfer($) Child Assets($) Transfer Obs
Parent Gross Wealth
19-24 0.26 384 16132 0.0419 686
25-29 0.21 242 43318 0.0074 985
30-34 0.17 307 53165 0.0048 953
35-39 0.15 332 87495 0.0035 570
40-44 0.15 389 142758 0.0069 124
Note.— I focus on the moments of these five age groups because of the small sample size problem
in the other age groups. In my PSID sample, there are 21 adult children between age 45 to 49, 9
adult children between age 50 to 55, and 8 adult children above 55.
Figure 8 displays the model fit. Panel (c) compares the model implied fraction of inter vivos
transfers to parental gross wealth ( XGPt ) and its data counterpart. In general, the model matches
t
this untargeted moment well.
26
Table 5: Internally Calibrated Parameters
Parameter Name Value

β Discount factor 0.97
ρ Coef of risk aversion 1.1985
η Parental Altruism 0.645
φ Child Terminal value 15
104
0.26 15
Data Data
0.24 Model Model
Fraction of Children
Mean Child Assets

0.22 10
0.2
0.18 5
0.16
0.14 0
23-25 25-29 30-34 35-39 40-44 23-25 25-29 30-34 35-39 40-44
Child Age Group Child Age Group
(a) Fraction of Children with Transfers (FracJ ) (b) Mean Child Assets (AK
J )
0.05
Data
Fraction of Parent Gross Wealth
Model
0.04
0.03
0.02
0.01
0
23-25 25-29 30-34 35-39 40-44
Child Age Group
(c) Transfers as a Fraction of Parental Gross Wealth
(Untargeted)
The data moments are summarized in the second, fourth and the fifth columns in Table 4. The
parameters for panels (a)-(c) are summarized in27
Table 5.
Figure 8: Model Fit

4.3 Discussions of Identification
Due to computational burdens, I did not structurally estimate this model. However, I would like to
discuss why FracJ and AK
J are informative to determine the four internally calibrated parameters.
dAK
The discount factor β is identified by dJ ,
J
which is the rate of asset accumulation over the life
cycle. Because of the child’s incentives to under-save for more future transfers, the slope of AK
J is
very sensitive to the change in β. In Figure 9, a slightly lower discount factor results in a flat age
profile of child assets.
104
0.3 15
Data Data
0.28 =0.96 (baseline) =0.97 (baseline)
=0.95 =0.96
0.26
Mean Child Assets

10
0.24
0.22
0.2
5
0.18
0.16
0.14 0
23-25 25-29 30-34 35-39 40-44 23-25 25-29 30-34 35-39 40-44
J )
Figure 9: Identifying β
The coefficient of risk aversion ρ is identified by dFrac

dJ
J
. The risk aversion affects the change in
the fraction of constrained children over time, which in turns affects the rate at which the fraction of
children receiving inter vivos transfers declines over the life cycle. Figure 10 shows that the standard
value of risk aversion (ρ = 2) in the literature produces a flat decline of FracJ . Calibrating this
parameter improves the model fit.
28
104
0.26 15
Data Data
=2.0 =2.0
Mean Child Assets

0.22 10
0.2
0.18 5
0.16
0.14 0
23-25 25-29 30-34 35-39 40-44 23-25 25-29 30-34 35-39 40-44
J )
Figure 10: Identifying ρ
The fraction of children with transfers and the mean child assets are jointly determined by
the four internal parameters. Since β and ρ are pinned down by the two slopes, we can use the
two levels to identify η and φ. In Figure 11, the fraction of children between age 23-25 receiving
transfers is sensitive to the change in η, so the degree of altruism is mostly pinned down by the
intercept of FracJ . The last parameter φ is identified by the intercept of AK
J .
16
16
I have considered introducing the average saving at the age 61 as the eleventh moment to identify the child
continuation value φ. This moment can be collected using the PSID main file but not in my PSID sub-samples of
parent-child pairs. Therefore, I am hesitant to use this as a targeted moment. The mean saving between age 57 and
age 63 in the PSID SRC sample in 1989 is $271, 971 and the 95 % confidence interval is [$193, 821; $350, 121]. Using
the benchmark parameters in Table 5, the model implies that the average child saving at the age 61 is $339, 345,
which is within the 95 % confidence interval.
29
104
0.26 15
Data Data
=0.55 =0.55
Mean Child Assets

0.22 10
0.2
0.18 5
0.16
0.14 0
23-25 25-29 30-34 35-39 40-44 23-25 25-29 30-34 35-39 40-44
J )
Figure 11: Identifying η
104
0.26 15
Data Data
0.24 =15 (baseline) =15 (baseline)
=16.0 =16.0
Mean Child Assets
0.22 10
0.2
0.18 5
0.16
0.14 0
23-25 25-29 30-34 35-39 40-44 23-25 25-29 30-34 35-39 40-44
J )
Figure 12: Identifying φ
30
4.4 Results
Consumption, Wealth, and Inter Vivos Transfers Over the Lifecycle
Figure 13 displays the parent’s and the child’s lifecycle profiles. The income process is exogenously
fed into the model and the average income peaks at around age 50. Consumption, wealth and
inter vivos transfers are generated from the model with parameters discussed in the subsection
4.2. The average child consumption grows steadily because of the precautionary saving motive.
The mean parent wealth displays a typical hump shaped, indicating that parents save during their
working lives and dissave to sustain the consumption level after retirement. Notice that this is a
two generation model instead of a dynastic model. The child’s behavior at age 60 does not mirror
the parent’s behavior at age 60. The model does not produce a good fit to the parent’s savings in
the data. This is a typical problem of the lifecycle model that retired individuals quickly run down
their savings as in panel (b), while the data pattern suggests a slow decline (De Nardi et al. 2016).
In panel (c), the pattern of average inter vivos transfers is mostly flat. Parents are inclined to
delay giving transfers until late in the lifecycle. In Panel (d), the fraction of children who receive
transfers by age displays a U-shaped. I further decompose children with transfers into two groups:
those who are constrained (AHK type) and those who save (BW type). Since children build up
savings and earn more as they get older, the fraction of children defined as AHK group decreases
steadily. In contrast, the fraction of children defined as BW group increases with age. While most
transfers occur near the end of the parent’s life, parents may not wish to delay transfers until their
death. By giving away inheritance a little bit earlier, parents can eliminate children’s incentives to
under-save.
31
105 105
4 4
Income Income
3.5 3.5
Consumption Consumption
Wealth Wealth
3 3
2.5 2.5
Means($)
Means($)
2 2
1.5 1.5
1 1
0.5 0.5
0 0
25 30 35 40 45 50 55 60 55 60 65 70 75 80 85 90
Child age Parent age
(a) Child Lifecycle Means (b) Parent Lifecycle Means
104
4 0.5
Inter Vivos Transfers 0.45 Inter Vivos Transfers

3.5
BW Transfers
0.4 AHK Transfers
3
0.35
2.5
0.3
Means($)
2 0.25
0.2
1.5
0.15
1
0.1
0.5
0.05
0 0
25 30 35 40 45 50 55 60 25 30 35 40 45 50 55 60
Child age Child age
(c) Average Inter Vivos Transfers (d) Fraction of Children with Transfers
The AHK transfer is defined as the transfer given to children whose saving is zero (constrained); and
the BW transfer is defined as the transfer given to children with positive savings (unconstrained).
The mean savings between age 57 and age 63 in the PSID SRC sample in 1989 is $271, 971 and the
95 % confidence interval is [$193, 821; $350, 121].
Figure 13: Lifecycle Profiles
32
Estimating Transfer-Income Derivatives
I now turn to the estimation of transfer-income derivatives. I simulate this calibrated model to
generate an artificial panel of 10,000 parent-child pairs, for as long as the parents are alive. From
this big panel, I draw 3, 339 parent-child pairs according to the number of observation in each child
age-bin in the PSID as in Table 4. Therefore, the majority of children sampled in our simulation
exercise are younger than age 40 and AHK transfers are more relevant than BW transfers (see
panel (d) of Figure 8).
I run the following Tobit regression:
G∗i = a + bp XiP + bk XiK + α1 ZiP + α2 ZiK + δage + i , (10)

(
G∗i , if G∗i ≥ 0
Gi =
0, if G∗i < 0,
where δage is the age dummy. It is important to control the permanent income components in
this regression exercise. The derivative restriction would fail if the distribution of future incomes
depended on current incomes.17 For instance, in the wage equation (8), the permanent income
K .
component ZtK has a predictive power over the next period income, Yt+1
Our interest is in knowing whether the model can generate low estimated values of the difference,
b̂p − b̂k , as found in empirical studies. To highlight the bias that comes from mixing the two transfer
types, I separate the simulated transfers into AHK type and BW type, based on whether the child
is credit-constrained, and run the same Tobit regression as in (10) for each group. Because of the
small sample size, I repeatedly draw 3,339 pairs 100 times from the big panel and calculate the
mean and the standard deviation. Table 6 reports the findings.
The results suggest that there is hope in reconciling the empirical estimate, 0.13, with predictions
of the altruism model, about 0.18. The model works well for reproducing the estimate of bk . It
should be stressed that the transfer-income derivatives — the responsiveness of transfers to changes
in the parent’s and the child’s income — are region-specific. Due to multiple transfer regions in this
model, the estimates of bp and bk have no meaningful interpretations. For instance, the model does
17
McGarry (2012) gives a clear explanation for why the derivative restriction does not hold in this case. I summarize
her discussions in Appendix A. AHK have controlled these permanent income components by estimating the parent’s
permanent income and child’s permanent income with the timing-averaged method and autoregressive method using
the PSID 1968-1987.
33
Table 6: Tobit Regression Analysis with Model Generated Data
Coefficient on parent’s Coefficient on child’s The Difference

current income (bp ) current income (bk )
Panel A. Empirical estimates from AHK
Total Inter-vivos Transfer 0.05 -0.08 0.13
Panel B. Model estimates
Total Inter-vivos Transfer 0.0946 -0.0808 0.1755
(0.0191) (0.0233) (0.0382)
- AHK Transfers (73.91%) 0.0281 -0.9801 1.0082
(0.00006) (0.0693) (0.0693)
- BW Transfers (26.09%) 0.0557 0.0055 0.0501
(0.0295) (0.0357) (0.0526)
Means and standard deviations (in parenthesis) of estimates of bp and bk from (10) are calculated
from 100 simulations of samples with 3,339 parent-child pairs.The AHK transfer is defined as the
transfer given to children whose saving is zero (constrained); and the BW transfer is defined as the
transfer given to children with positive savings (unconstrained). Among children with transfers,
73.91% of them are categorized as AHK group, while 26.09% of them are categorized as BW group.
not imply the following interpretations: a one-dollar increase in the parent’s income increases their
transfer by 9 cents, and a one-dollar increase in the child’s income reduces the transfer received
by 8 cents. However, the model implies that among credit-constrained children (AHK group), a
reduction in parents’ income by one dollar reduces their transfer by 2.81 cents, and a one-dollar
increase in the child’s income reduces the transfer by 98 cents.
Why is the difference of the estimates, b̂p − b̂k , not equal to one in the BW group? The number
of transfer regions (subgames) expands as we solve more periods backward. For example, in a three-
period model, there are three transfer regions. In figure 14, the first segment is a credit-constrained
region, or AHK region. The second segment is an unconstrained region and the child expects to
receive BW transfers in the next period if he draws a bad income shock; with a good income shock
in the next period, the child does not receive transfers. The third segment is an unconstrained
region and indicates the final time for the child to receive transfers. In this example, the last two
segments are both categorized as BW group — children receive transfers and are unconstrained.
Therefore, we are not able to obtain an estimate of b̂p − b̂k close to one unless we further separate
34
5
4.5

4
3.5
AHK: A K
2
=0
3
2.5 BW: A K
2
>0, G 2 0, G 3 =0
2
BW: A K
2
>0, G 2 =G 3 =0
1.5
0.5
0
5 10 15 20 25 30 35 40

1
Figure 14: First-Period Transfers as a Function of X1K in a Three-Period Model
the BW group into two groups.

As a final remark, the above exercise does not attempt to correct the bias in estimates of transfer-
income derivatives or declare altruism as the true motive for parents giving transfers. Instead, I
take the quantitative exercise to demonstrate that the low empirical estimate of the difference
between transfer-income derivatives may not be deemed as evidence to reject the altruism model.
Mixing the two transfers types in the data is a plausible explanation for the low value estimated.
Even though children categorized as BW group account for a small fraction in this exercise, the
estimate of the difference is far than less one. Given the model estimated difference, perhaps we
should not reject the hypothesis that parental altruism is the main motive for private transfers.
5 Conclusion
Identifying motives for intergenerational transfer is important because it speaks to the effective-
ness of public redistribution. The altruism model implies that the effect of public transfers will be
neutralized by private transfers, while the same implication does not apply to the alternative hy-
35
pothesis — that intergenerational transfer flows are because of a mutual exchange between parents
and children. The standard way to distinguish the two motives is to check the derivative restriction
implied by altruism: the difference in the two transfer-income derivatives equal one. Empirical
studies measure a value close to zero rather one. Such a low value is considered as evidence in favor
of the exchange model.
This paper revisits the workhorse model for testing altruism using data on inter vivos transfers.
I characterize a full solution to the same two-period model where parents and children interact
strategically in a stochastic environment with credit constraints. There are three findings. First,
inter vivos transfers can be positive among children who are not liquidity-constrained. Previous
studies have restricted to one of the two cases in this model and thus parents’ behavior of transfer-
ring money to unconstrained children is missed. Second, I show that there are two types of altruistic
transfers, AHK and BW, distinguished by different equilibrium outcomes. The AHK (BW) child
recipients are liquidity-constrained (unconstrained), expect to receive the second-period transfers
with some positive probability (zero probability) and under-save (save efficiently). The model can
generate a non-monotonic relationship between transfers and parent’s incomes (child’s incomes)
because of the switch in equilibrium path. I further show that if the data contains the two transfer
types, the estimate of the difference in the two derivatives could be downward biased from one.
Lastly, I ask whether the full solution helps explain the low estimated value; e.g. 0.13 in AHK. I
develop a quantitative lifecycle model where parents and children interact strategically until parents
die. With reasonable parameterization, the model generates the estimate (0.18) in line with the
empirical evidence. This result suggests that we should not rely on the estimates of transfer-income
derivatives to assess the validity of altruism hypothesis.
36
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41
Appendix A
A1. Properties of the Marginal Benefit of Savings in the Child’s
Maximization Problem
The marginal benefit of savings is the right-hand side of the child’s euler equation:
Z Y (AP ,AK )
2 2 ∂G2
β u0 (1 + r)AK 2 + Y2
K
+ G 2 1 + r + K
f (Y2K |I1 )dY2K
0 ∂A2
Z ∞
0
+β u (1 + r)A2 + Y2 (1 + r)f (Y2 |I1 )dY2K .
K K K
(11)
Y (AP K
2 ,A2 )
Define AK∗
2 as the threshold value that satisfies
Y AP2 , AK∗

2 = 0,
which means that if the child saves more than AK∗ K

2 , then G2 = 0 ∀Y2 . In the following, I want to
show that the derivative of (11) with respect to AK K∗

2 does not exist at the point of A2 .
Proof. What I aim to show is that the right limit does not equal to left limit of the slope at
AK∗ K∗
2 . Let’s consider the right limit. For the amount of assets greater than or equal to A2 ,
Y (AP2 , AK
2 ) ≤ 0.
(R ∞
0 u0 (1 + r)(AK∗
2 + h) + Y2
K (1 + r)f (Y K |I )dY K
2 1 2
lim β
h→0+ h
R∞
u0 (1 + r)AK∗ K (1 + r)f (Y K |I )dY K )
0 2 + Y2 2 1 2
−
h
(Z )
∞
= lim β u00 (1 + r)(AK∗
2 + h) + Y2
K
(1 + r)2 f (Y2K |I1 )dY2K
h→0+ 0
Z ∞
=β u00 (1 + r)AK∗
2 + Y2
K
(1 + r)2 f (Y2K |I1 )dY2K
0
∂G2
Before deriving the left limit, let’s discuss the property of ∂AK
.
2
∂G2
Lemma 1 If U (C2P , C2K ) is homothetic and G2 > 0, then ∂AK
is a constant number.
2
To see this, given the homothetic assumption, the MRS depends only on the ratio of C2P and
ucP CP
C2K . Therefore, the first-order equation that determines G2 can be rewritten as 2
ucK ≡ f ( C 2K ) = 1,
2 2
42
C2P
implying that the optimal C2K
is a constant number. Substitute this relation into the family resource
constraint: C2P + C2K = (1 + r)AP2 + (1 + r)AK K P K
2 + Y2 , we can derive the optimal C2 and C2 as a

constant fraction of the total family resources. Let’s say C2P = f (1 + r)AP2 + (1 + r)AK
2 + Y2
K ,

K P K K
and C2 = (1 − f ) (1 + r)A2 + (1 + r)A2 + Y2 , where f is a constant number. Finally, we can
substitute C2K into the child’s budget constraint: C2K = (1 + r)AK K
2 + Y2 + G2 . Then we obtain
∂G2
G2 = (1 − f )(1 + r)AP2 − f (1 + r)AK K

2 + Y2 , and ∂AK is a constant number.
2
I proceed to derive the left limit. Notice that Y (AP2 , AK∗ 2 + h) > 0 if h < 0.
( R Y (AP2 ,AK∗
2 +h) 0

K∗ + h) + Y K + G (AK∗ + h)

∂G2

0 u (1 + r)(A 2 2 2 2 1 + r + K
∂A2
f (Y2K |I1 )dY2K
lim β
h→0− h
R∞
Y (AP K∗ u0 (1 + r)(AK∗ 2 + h) + Y2
K (1 + r)f (Y K |I )dY K
2 1 2
2 ,A2 +h)
+
h
R ∞ 0 K∗ K

(1 + r)f (Y2K |I1 )dY2K
)
0 u (1 + r)A2 + Y2
−
h
(Z P K∗
Y (A2 ,A2 +h) ∂G2 2
= lim β u00 (1 + r)(AK∗2 + h) + Y 2
K
+ G 2 (A K∗
2 + h) 1 + r + f (Y2K |I1 )dY2K
h→0− 0 ∂AK 2
Z ∞
+ u00 (1 + r)(AK∗ 2 + h) + Y2
K
(1 + r)2 f (Y2K |I1 )dY2K
Y (AP K∗
2 ,A2 +h)
∂G2 ∂Y
+ u0 (1 + r)(AK∗ P K∗
2 + h) + Y (A2 , A2 + h) + G2 (A2 + h)
K∗
1+r+ K
f (Y (AP2 , AK∗
2 + h))
∂A2 ∂AK2
)
∂Y
− u0 (1 + r)(AK∗ P K∗ P K∗
2 + h) + Y (A2 , A2 + h) (1 + r)f (Y (A2 , A2 + h))
∂AK2
(Z
∞
=β u00 (1 + r)AK∗
2 + Y2
K
(1 + r)2 f (Y2K |I1 )dY2K
0
∂G2 ∂Y
+ u0 (1 + r)AK∗ P K∗
2 + Y (A2 , A2 ) 1+r+
K
f (Y (AP2 , AK∗
2 ))
∂A2 ∂AK2
)
∂Y
− u0 (1 + r)AK∗ P K∗ P K∗
2 + Y (A2 , A2 ) (1 + r)f (Y (A2 , A2 ))
∂AK 2
∂G ∂Y
2
= the right limit + βu0 (1 + r)AK∗ P K∗
2 + Y (A2 , A2 ) K
f Y (AP2 , AK∗
2 ) .
∂A2 ∂AK 2
| {z } | {z }
(−) (−)
43
0.065
0.06
The Marginal Return of Savings

0.055
0.05
0.045
0.04
0.035
0.03
0.025
0.02
0 5 10 15 20 25 30 35 40
AK
2
Figure 15: The MB of the Analytical Example
I apply Leibniz Rule and L’ Hospital’s Rule in deriving the above equations. The left limit is
greater than the right limit.
Analytical Example. Assume u(c) = log(c), and Y2K ∼ U[0, b], where b = 20 is set large enough
so that Y (AP2 , AK P K
2 ) < b for all feasible choices of (A2 , A2 ). Parameter values for this example are
η = 0.3, r = 0.03, and AP2 = 28. From (1), we can derive
Y = η(1 + r)AP2 − (1 + r)AK

2 ,
and AK∗ P K∗
2 = ηA2 . In Figure 15, the MB is not differentiable at the point A2 = (0.3) ∗ 28 = 8.40.
In what follows, I derive the analytical expression of the MB.


b+(1+r)AK
#  1+r h i
log 2
, if AK P
2 < ηA2
"
0 K
∂G2 K

b η(1+r)
(A P +AK )
E1 u C2 1 + r + 1{Y2 < Y } = h 1+η K i 2 2
∂AK  1+r log (1+r)A2 K+b , if AK P
2 2 ≥ ηA2 .

b (1+r)A 2
44
We first solve for the optimal rule of G2 and C2K :
(
η P − 1 K + Y K , if Y K
1+η (1 + r)A 2 1+η (1 + r)A 2 2 2 <Y
G2 =
0, if Y2K ≥Y
(
η P K K ,
K 1+η (1 + r)A2 + (1 + r)A2 + Y2 if Y2K <Y
C2 =
(1 + r)AK 2 + Y2 ,
K if Y2K ≥Y
, where Y = η(1 + r)AP2 − (1 + r)AK

2 . There are two cases:
• If AK P
2 < ηA2 , so Y > 0
" #
0 K
∂G2 K
E1 u C2 (1 + r) + 1{Y2 < Y }
∂AK 2
Z η(1+r)AP −(1+r)AK Z b
2 2 1 η 1 K 1 1
= K
(1 + r) dY 2 + K
(1 + r) dY2K
0 C 2 1 + η b P K
η(1+r)A2 −(1+r)A2 C 2 b
Z η(1+r)AP Z b+(1+r)AK
2 1 (1 + r) 2 1 1+r
= dX + dX
η(1+r)
(A P +AK ) X b η(1+r)A P X b
1+η 2 2 2
1+r h i 1+r h η(1 + r) i

= log η(1 + r)AP2 − log (AP2 + AK2 )
b b 1+η
1+r h i 1+r h i
+ log b + (1 + r)AK 2 − log η(1 + r)AP2
b b !
1+r h
K
i h η(1 + r)
P K
i
= log b + (1 + r)A2 − log (A2 + A2 )
b 1+η
1+r h b + (1 + r)AK i
2
= log η(1+r) .
b (A P + A K)
1+η 2 2
• If AK P
2 ≥ ηA2 , so Y ≤ 0
45

0
C2K

E1 u (1 + r)
Z b
1 1
= K
(1 + r) dY2K
0 C2 b
Z (1+r)AK
2 +b
1 1
= (1 + r) dX
(1+r)AK X b
2 h i
1+r K
i h
K
= log (1 + r)A2 + b − log (1 + r)A2
b
1+r h (1 + r)AK + b i
2
= log
b (1 + r)AK2
A2. Revisit the Proof in AHK
The child’s first order equation is

h i
Z Y ∂G2
0 0
C1K K
u0 C2K f (Y2K |I1 )dY2K + λ

u = β(1 + r)E1 u C2 +β (12)
0 ∂AK
2
The parent’s first order equations are

Y
∂C1K
Z
0 0
∂G2
C1P C1K u0 C2P f (Y2K |I1 )dY2K

λG = u − ηu +β 1− (13)
0 ∂AK
2 ∂G1
Y
∂C1K
Z
h i ∂G2
u0 C1P = β(1 + r)E1 u0 C2P − β u0 C2P f (Y2K |I1 )dY2K .

(−1) (14)
0 ∂AK
2 ∂A P
2
In AHK, the claim is that if the following conditions hold, then G1 must be zero. Condition 1 is
that the child is unconstrained. Condition 2 is that f (Y2K |I1 ) is positive for at least some values
of Y2K > Y (AP2 , AK P K
2 ) for all feasible values of (A2 , A2 ) (Condition 2 always holds because of the
unbounded income support).

Proof. What we want to show is that if λ = 0, then λG > 0.
Z Y
h
0
i ∂G2 ∂C1K
P
λG = β(1 + r)E1 u C2 − β u0 C2P (−1) f (Y2K |I1 )dY2K
0 ∂AK 2 ∂A P
2
Z Y
h i ∂G2
− β(1 + r)E1 ηu0 C2K − β ηu0 C2K f (Y2K |I1 )dY2K

∂A K
0 2
Z Y K
∂G2 ∂C1
+β u0 C2P K
1− f (Y2K |I1 )dY2K .
0 ∂A2 ∂G1
46
From (1) in the second-period, we can replace ηu0 C2K with u0 C2P if Y2K < Y , and collect terms

to obtain
h i
λG = β(1 + r)E1 u0 (C2P ) − ηu0 (C2K )
| {z }
(+)
Y ∂C K ∂C1K ∂G2
Z
+β u0 C2P 1
− f (Y2K |I1 )dY2K (15)
0 ∂AP2 ∂G1 ∂AK
| {z } | {z2}
(?) (−)
The positive sign of the first item is due to (1), where u0 C2P > ηu0 C2K if a transfer is at the

∂C1K ∂C1K
corner solution — the case that Y2K > Y . In AHK, the sign of ∂AP
and ∂G1 is solved from
2
differentiating (12) given λ = 0. Define

Z ∞ Z Y
0
∂G2
K K K
u0 C2K f (Y2K |I1 )dY2K −u0 X1K +G1 −AK

FAK ≡ β u C2 (1+r)f (Y2 |I1 )dY2 +β 1+r+ K 2
2
Y 0 ∂A2
From the implicit function theorem, we know
∂AK
2
−FAK G1
2
= ,
∂G1 FAK AK
2 2
∂AK
2
−FAK AP
2 2
= ,
∂AP2 FAK AK
2 2
∂C1K ∂C1K ∂AK2 ∂AK2

− P
= 1 + P
−
∂G1 ∂A2 ∂A2 ∂G 1
FAK AK − FAK AP + FAK G1
2 2 2 2 2
=
FAK AK
2 2
FAK G1 = −u00 C1K

2
Z Y
∂G2 2 K ∂G2 ∂Y
FAK AP = β u00 C2K 1 + r + K
f (Y2K |I1 )dY2K +βu0 C 2 K
f (Y ) P
2 2
0 ∂A ∂A2 ∂A2
| {z 2 } | {z }
K K
∂C2 ∂C2 (−),overlooked in AHK
=
∂AK
2 ∂AP
2
Z Y Z ∞
00
∂G2 2
C2K f (Y2K |I1 )dY2K + β u00 C2K (1 + r)2 f (Y2K |I2 )dY2K

FAK AK =β u 1+r+
2 2
0 ∂AK2 Y
K ∂G2 ∂Y
+ βu0 C 2 f (Y ) K +u00 C1K

K
∂A2 ∂A2
| {z }
(+),overlooked in AHK
47
In the AHK proof, changes in Y were not captured in their derivations (these items should appear
in K2 and K3 on page 1163 in AHK). If these overlooked items are omitted, we arrive at the
following.
∂C1K ∂C1K FAK AK − FAK AP + FAK G1

2 2 2 2 2
− P
=
∂G1 ∂A2 FAK AK
2 2
R∞
β Y (AP ,AK ) u00 C2K (1 + r)2 f (Y2K |I1 )dY2K

2 2
= R 2
Y (AP ,AK ) ∂G2
R∞
β 0 2 2 u00 C2K 1 + r + ∂A f (Y2K |I1 )dY2K + β Y (AP ,AK ) u00 C2K (1 + r)2 f (Y2K |I2 )dY2K + u00 C1K

K
2 2 2
> 0,
which is exactly (A18) on page 1163 in AHK.18

How to interpret AHK result? If the child is unconstrained, the parent delays making transfers
as long as possible. The Intuition given by AHK is as follows. First, the parent wishes to delay
transfers until she observes the second-period child’s income to avoid the scenario that the non-
negative constraint on future transfers is binding, which is captured by the first positive sign in
(15). Second, for every dollar given to the child, the child consumes too much relative to what his
parent wants him to do. Therefore, the parent chooses to put that dollar into savings and transfer
to her child in the second period. By doing so, the parent can restrict overconsumption in the first
∂C1K ∂C1K
period, which is captured by the negative sign of ∂AP
− ∂G1 .
2
AHK result is valid if (i) Y (AP2 , AK P K

2 ) > 0 for all feasible choices of A2 and A2 so the
child’s unconstrained first-order equation is everywhere differentiable, and (ii) the absolute value
R∞
of the overlooked items are relatively small compared to the absolute value of β Y u00 C2K (1 +

r)2 f (Y2K |I1 )dY2K , for example, high ρ (coefficient of the risk aversion).
18
In AHK, they assume β = 1, and r = 0. They use R to imply parental transfers and z(AP K
2 , A2 ) to imply the
∂ 2 G2
income threshold. Another difference is that ∂AK is omitted in my derivations. According to Lemma 1, I have shown
2
∂ 2 G2
that ∂AK
= 0 if the utility function is homothetic.
2
48
A3. Deriving the Transfer-Income Derivatives Restriction
Let

F1i G1 , AP2 ; X1P , X1K = 0

F2i G1 , AP2 ; X1P , X1K = 0
be the two equations that solve our Stackelberg game, for i ∈ {AHK, BW}. The state variables
are X1P and X1K , and the endogenous variables are G1 and AP2 . After G1 and AP2 are determined,
we can solve for AK
2 from the child’s response function. Therefore, the child’s choice variables can
be expressed as a function of (G1 , AP2 ). As pointed out in AHK, the variables X1P , X1K , and G1 in
the child’s problem and the parent’s problem always appear in a form of X1P − G1 and X1K + G1 .
Therefore, we can rewrite F1i and F2i as

F1∗i X1K + G1 , X1P − G1 , AP2 =0

F2∗i X1K + G1 , X1P − G1 , AP2 = 0,
∂G1 ∂G1
for i ∈ {AHK, BW}. Then I apply the implicit function theorem to solve for ∂X1K
and ∂X1P
.
∂G1 P
∗i ∗i ∗i ∂A2 ∗i
(F11 − F12 ) + F13 = −F11
∂X1K ∂X1K
∂G1 P
∗i ∗i ∗i ∂A2 ∗i
(F21 − F22 ) + F23 = −F21
∂X1K ∂X1K
∂G1 P
∗i ∗i ∗i ∂A2 ∗i
(F11 − F12 ) + F 13 = −F12
∂X1P ∂X1P
∂G1 P
∗i ∗i ∗i ∂A2 ∗i
(F21 − F22 ) + F 23 = −F22 .
∂X1P ∂X1P
Using Cramer’s rule, we can obtain
∂G1 ∗i F ∗i + F ∗i F ∗i
−F11 23 21 13
=
∂X1K ∆
∂G1 ∗i F ∗i + F ∗i F ∗i
−F12 23 22 13
= ,
∂X1P ∆
∗i − F ∗i )F ∗i − (F ∗i − F ∗i )F ∗i . Then it is easy to show that ∂G1 ∂G1
where ∆ = (F11 12 23 21 22 13 ∂X1P
− ∂X1K
= 1.
49
A4. Four Cases of the Timing of Transfers
-0.15 12
-0.16

-0.17 10
-0.18 Local Max

-0.19 8
-0.2
6
-0.21
-0.22
4
-0.23
-0.24 2
-0.25 The child is unconstrained, A K
2
>0
0
0 1 2 3 4 5 6 7 8 9 10 0 1 2 3 4 5 6 7 8 9 10
Figure 16: G1 > 0 (BW Transfers) and G2 = 0
-0.07 25
-0.075
20
-0.08
-0.085
Local Max = Global Max 15
-0.09
-0.095 10
-0.1
-0.105 5
-0.11
0
0 5 10 15 20 25 0 5 10 15 20 25
Figure 17: G1 > 0 (AHK Transfers) and G2 > 0 for some Y2K
50
-0.18 10
-0.19 9

-0.2 8
-0.21 7
Local Max = Global Max
6
-0.22
5
-0.23
4
-0.24
3
-0.25
2
-0.26
1
-0.27
0
0 1 2 3 4 5 6 7 8 9 10 0 1 2 3 4 5 6 7 8 9 10
Figure 18: G1 = 0 and G2 > 0 for some Y2K

-0.1 12
-0.2
Child Saving on the Equilibrium Path of G 2 =0
10
-0.3
-0.4 Local Max = Global Max 8
-0.5
6
-0.6
-0.7 4
-0.8
2
-0.9
-1
0
0 1 2 3 4 5 6 7 8 0 1 2 3 4 5 6 7 8
Figure 19: G1 = 0 and G2 = 0
51
Appendix B
B1. The Construction of Variables of Parent-Child Pairs
In this section, I discuss how to construct the sample used for Figure 7 and Table 4. I use data
from the PSID main file 1984, 1988, and 1989; and the 1988 time and money transfers file. I use
the 1984 main file to construct parent and child assets before the transfer decision is made, which
can be thought as APt and AK
t in the model. The 1984 main file is the most recent year prior to
1988 in which detailed information on assets was collected. The measure of assets is defined as
imputed wealth with home equity (S117). I use the 1988 main file to construct parent and child
incomes, YtP and YtK respectively. Nonasset net family income in 1988 is our measure of current
incomes (V16420+V17534). The parent and child assets after parent giving transfers, APt+1 and
AK
t+1 are taken from the 1989 main file (S217).
The measure of transfer, Gt , is based on the 1988 time and money transfers file. I define adult
children receiving money help from parents if the respondent’s answer satisfies two conditions.
First, the respondent received money help from a parent or someone else not in the family unit
(TMTV2=2). Second, the respondent received any types of parental help specified in the question
TMTV2 (TMTV3=1). Then, I measure the dollar amount of help from the variable TMTV13.
Specifically, the respondent was asked how much loans, gifts, or support (worth 100 dollars or
more) received from parents worth were altogether in 1987.
I adopt the following selection criteria according to AHK, although the final effective sample is
slightly different from theirs:
• Respondents were heads or wives of 1988 PSID households.
• At least one parent of the respondent was alive in 1988.
• At least one parent of the respondent were in 1968 PSID families.
Given that a child’s mother and father may be in separate households, some children may appear
in two records. Parents with multiple children appear in as many records as the number of their
children. The effective sample consists of 3, 356 parent-child pairs, including 673 pairs with positive
52
transfers, and the average transfer received is $1, 478. The final sample in AHK consists of 3, 402
parent-child pairs, including 687 pairs with positive transfers, and the average transfer received is
$1, 507.
B2. The Construction of Wage-Age Profile and Initial Distribution
I use earnings data for the head of the household from the PSID main file 1969 to 2017. Top-coded
earnings are multiplied by 1.5, which is a common ad hoc correction procedure (Autor, Katz, and
Kearney 2006). I adopt the following selection criteria according to Huggett, Ventura, and Yaron
(2011):
• Respondents’ ages are between 23 and 63.
• For respondents over age 30, they work between 520 and 5,820 hours per year and earn at
least $1, 500 (in 1968 prices). For respondents age 30 and below, they work between 260 and
5,820 hours per year and earn at least $1, 000 (in 1968 hours).
I run the following regression to construct the wage-age profile:
Meanj,t = βjMean + γtMean + Mean

j,t , (16)
where Meanj,t denotes the mean of log earnings among individuals in the age bin j at time t.
I consider 6-year bins. Therefore, the age bin 30 includes individuals of age between 27 and 33.
Equation (16) implies that the time effect is controlled instead of the cohort effect. As a well known
problem pointed out by Deaton and Paxson (1994), we cannot separately identify the time effect
and the cohort effect to construct age profiles. The standard approach is to control one of the two
effects. Figure 20 displays the wage-age profile β Mean where the intercept(β Mean ) is normalized
j 23
β Mean
to one. Using βjMean , I construct Γj = jMean .
βj−1
53
1.7
1.6
Normalized Earnings($)
1.5
1.4
1.3
1.2
1.1
1
25 30 35 40 45 50 55 60
Age
Figure 20: Lifecycle Earnings
Appendix C
Computational Algorithm
1. Place a grid on parents’ and children’s assets (aP and aK ), parents’ and children’s cash-on hand
before the transfer decision is made (xP and xK ), children’s cash-on hand after the transfer
decision is made (xg ) , the ratio of parents’ current permanent income to children’s current
permanent income (θ), and the remaining money after parents determine consumption level
(m ≡ xP − cP ). To capture the curvature of the consumption rule when agents are close to
borrowing limits, the grid will be finer for low value of assets and cash-on-hand.
(aK
T +1 )
1−ρ
2. In period T , with the terminal value function, vTK+1 (aK
T +1 ) = φ 1−ρ , the child solves
1 1
vTK (xK
T + gT ) ≡ max (cK )1−ρ + βφ (aK )1−ρ
1−ρ T 1 − ρ T +1
s.t. cK K K
T = xT + gT − aT +1
54
, and we obtain the policy functions and value function
cK
T = s xK
T + gT )
aK K
T +1 = (1 − s)(xT + gT )
xK
T + gT )
1−ρ h i
vTK (xK T + g T ) = (s)1−ρ
+ βφ(1 − s)1−ρ
1−ρ
(βφ)−1/ρ
h i
, where s = 1+(βφ) . Define α = (s)1−ρ + βφ(1 − s)1−ρ , and the parent chooses g ≥ 0
−1/ρ T
to maximize
1 α
max (xPT − gT )1−ρ + η (xK + gT )1−ρ
gT ≥0 1−ρ 1−ρ T
, so " #
1 (αη) −1/ρ
gT∗ = max xP − xK , 0
1 + (αη)−1/ρ T 1 + (αη)−1/ρ T
cPT = xPT − gT∗

∗
cK
T = s(xK
T + gT )
∗
aK K
T +1 = (1 − s)(xT + gT ).
The value functions after both income shocks are realized are
xK ∗ 1−ρ h
T + gT )
i
vTK (xPT , xK
T , θT ) = (s)1−ρ + βφ(1 − s)1−ρ
1−ρ
1
vTP (xPT , xK
T , θT ) = (cP )1−ρ + ηvTK (xPT , xK
T , θT ).
1−ρ T
19
3. Iterate backwards on t = T − 1, ......., 1. In each t:
P (xP , xK , θ
(a) Given vt+1 K P K
t+1 t+1 t+1 ) and vt+1 (xt+1 , xt+1 , θt+1 ), compute the value function before
transitory shock is realized.
j R∞ j
wt+1 (aPt+1 , aK
t+1 , θt+1 ) ≡ 0 vt+1 (xPt+1 , xK
t+1 , θt+1 )dF (U )
19
At the final period T , the ratio of parents’ permanent income to children’s permanent income (θt ) does not
affect the value function; however, as we solve backwards on t, vtP and vtK would depend on the ratio because θt gives
available information to predict θt+1 . To present the following algorithm recursively, I write vTP and vTK as a function
of θT even though they do not depend on θT .
55
s.t. xPt+1 = (1 + r)aPt+1 + θt+1
xK K
t+1 = (1 + r)at+1 + U
, and j ∈ {P, K} . Replace xPt+1 and xK

t+1 from the budget constraints into the value
functions, and then apply Gauss-Hermite quadrature to compute these integrals:

R∞ j P +θ K + exp(u) , θ

1 u2
t+1 √

v
−∞ t+1 (1 + r)a t+1 t+1 , (1 + r)a t+1 2
exp − 2σ 2 du
2πσu u
R∞ j √
= −∞ vt+1 (1 + r)aPt+1 + θt+1 , (1 + r)aK √1 exp − µ2 dµ

t+1 + exp( 2σu µ) , θt+1 π
P K
P
≈ i ωi f (at+1 , at+1 , θt+1 , µi )
, where
j
√ 1
f (aPt+1 , aK , θ ,
t+1 t+1 iµ ) = v t+1 (1 + r)aP
t+1 + θ t+1 , (1 + r)aK
t+1 + exp( 2σ µ
u i ) , θ t+1 √
π
. The weights wi and nodes µi are determined from Gauss-Hermite formula of order 12.
P (aP , aK , θ
(b) Given wt+1 K P K
t+1 t+1 t+1 ) and wt+1 (at+1 , at+1 , θt+1 ), compute the value function be-
fore transitory shock and permanent shock are realized.
j R∞ 1−ρ j
Ewt+1 (aPt+1 , aK
t+1 , θt ) ≡ 0 (ΓK
t+1 N ) wt+1 (aPt+1 , aK
t+1 , θt+1 )dF (N )
ΓPt+1
s.t. θt+1 = θt
ΓK
t+1 N
, and j ∈ {P, K}. The ratio of parents’ permanent income to children’s permanent
income in the previous period, θt , is used to predict the next period ratio, θt+1 . Apply
Gauss-Hermite quadrature to compute these integrals:
1−ρ
R∞ K ΓP

j n2
wt+1 at+1 , at+1 , ΓK exp(n) θt √ 1 2 exp − 2σ
P K t+1

−∞ Γt+1 exp(n) 2 dn
t+1 2πσn n
√
1−ρ
R∞ K P
Γt+1

K aPt+1 , aK √1 exp − υ 2 dυ

= −∞ Γt+1 exp( 2σn ν) wt+1 t+1 , ΓK exp( 2σn ν) θt
√
π
t+1
P K
P
≈ i ωi f (at+1 , at+1 , θt , υi )
, where
√ ΓPt+1
1−ρ 1
f (aPt+1 , aK
t+1 , θt , υi ) = ΓK
t+1 exp( 2σ ν
n i ) wtj aPt+1 , aK
t+1 , √ θ t √
ΓK
t+1 exp( 2σn νi )
π
. The weights wi and nodes υi are determined from Gauss-Hermite formula of order 12.
56
(c) Solve the child’s problem to get policy functions: c˜t K (xgt , aPt+1 , θt ) and ãK P
t+1 (xgt , at+1 , θt ).
Define a consumption grid: cgrid ≡ [0, xgt ] with 150 uniform grid points. Choose cK
t ∈
cgrid to maximize
1
v˜t K (xgt , aPt+1 , θt ) ≡ max (cK
t )
1−ρ K
+ βEwt+1 (aPt+1 , aK
t+1 , θt )
cK
t ∈ cgrid 1 − ρ
s.t. aK K
t+1 = xgt − ct .
Because aK
t+1 in general does not locate on the specified asset grid points, I apply linear
K (aP , xg − cK , θ ).
interpolation to compute Ewt+1 t+1 t t t
(d) Rewrite parents’ maximization problem to two stage maximization. After the parent
chooses cPt in the first stage, the parent decides how to allocate the remaining money,
mt ≡ xPt − cPt , between savings and transfers. Define a transfer grid: ggrid ≡ [0, mt ]
with 200 uniform grids. Choose gt ∈ ggrid to maximize
!1−ρ
1
ṽtP (mt , xK
t , θt ) ≡ max −η c̃K P
t xgt , at+1 , θt
P
+ βEwt+1 (aPt+1 , e
aK
t+1 , θt )
gt ∈ggrid 1−ρ
s.t aPt+1 = mt − gt
xgt = xK t + gt

K K P
ãt+1 = ãt+1 xgt , at+1 , θt .

I apply bilinear interpolation to compute c̃K K K K
t xt + gt , mt − gt , θt , ãt+1 xt + gt , mt −

P (m −g , e
gt , θt and Ewt+1 K K
t t at+1 , θt ). From this step, we obtain policy functions g˜t (mt , xt , θt )
and ãPt+1 (mt , xK

t , θt ).
(e) Solve the parent’s first stage maximization. Define a consumption grid: cgrid ≡ [0, xPt ]
with 200 uniform grid points. Choose cPt ∈ cgrid to maximize
1
vtP (xPt , xK
t , θt ) ≡ max (cPt )1−ρ + ṽtP (mt , xK
t , θt )
cP
t ∈cgrid 1 − ρ
s.t. mt = xPt − cPt .
As before, I apply linear interpolation to evaluate ṽtP (mt , xK

t , θt ) if mt is not located on
the grid points.
57
(f) Evaluate policy functions and value functions on the state space (xPt , xK
t , θt )
m∗ ≡ m(xPt , xK
t , θt )
∗
cPt (xPt , xK P
t , θt ) = xt − m
a∗ ≡ aPt+1 (xPt , xK P ∗ K
t , θt ) = ãt+1 (m , xt , θt )
g ∗ ≡ gt (xPt , xK ∗ K
t , θt ) = g˜t (m , xt , θt )

∗ ∗
cKt (x P
t , xK
t , θt ) = c̃K
t x K
t + g , a , θt

∗ ∗
aK P K K K
t+1 (xt , xt , θt ) = ãt+1 xt + g , a , θt

∗ ∗
vtK (xPt , xK
t , θt ) = ṽt
K
xKt + g , a , θt .
58

JMP Chu

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Testing Parental Altruism: A Full Solution to a Dynamic Model of

November 27, 2019

JEL Classification: D15; D64; E21

2 A Two-Period Model of Altruistic Inter Vivos Transfers

borrow in the first period, AK

max u C2P + ηu C2K

s.t. C2P = (1 + r)AP2 − G2

The first order equation to determine G2 is

u0 C2P ≥ ηu0 C2K ,

value, G2 = 0. The optimal second-period transfer is summarized as follows:

C1K = (1 + r)AK + Y1K +G1 − AK

C1P = (1 + r)AP1 + Y1P −G1 − AP2

V1K (X1K + G1 , AP2 ), C1K (X1K + G1 , AP2 ), and AK K P

The first order equations are

The Marginal Benefit of Savings

(a) MB (b) MB: Decompose

Figure 1: Properties of The Marginal Benefit of Child’s Savings

2.2 Non Differentiability and Non Convexity

where C2K = (1 + r)AK K K P

behind this result.

is through the change in Y (AP2 , AK

(0.30.5 ) ∗ 28 = 15.33. The panel (b) of Figure 1 displays the MB as a function of AK

MB. Because of the drop of the income threshold effect at AK∗

1. The derivative of the MB with respect to AK K∗

2.3 Two Types of Altruistic Transfers

Table 1: A Summary of the Current View on the Timing of Transfers

Models with Perfect Credit Markets The Timing of Transfers Reference

subject to the following conditions:

V1K (X1K + G1 , AP2 ), C1K (X1K + G1 , AP2 ), and AK K P

The First Stage:

The Child Saving Function

-0.18 Local Max

Figure 2: An Example of Transfers Given to a Saving Child (BW Transfers)

Figure 3: An Example of Transfers Given to a Constrained Child (AHK Transfers)

The First-Period Transfer G1

Child First-Period Gross Wealth XK

(a) Transfers as a Function of X1K (b) Transfers as a Function of X1P

Figure 4: The First-Period Transfer Function

3 Testing Parental Altruism

Parent Objective Function

(a) X1K = 5.32 (b) X1K = 7.69

Figure 5: An Example of a Richer Kid with More First-Period Transfers

3.1 Biased Estimates in Transfer-Income Derivatives

The First-Period Transfer G1

Child First-Period Gross Wealth XK

(a) Transfers as a Function of X1K (b) Transfers as a Function of X1P

Figure 6: G1 (X1P , X1K ) versus Ĝ1 (X1P , X1K )

(1) (2) (3)

Xp 0.202∗∗∗ 0.378∗∗∗ 0.180∗∗∗

cons -1.089∗∗∗ -0.253∗∗∗ 0.282∗∗∗

3.2 Two Types of Altruistic Transfers in the PSID

−1000 −500 0 500 1000

4 A Lifecycle Model of Altruistic Inter Vivos Transfers

Yti = Zti Uti

Zti = Γit Zt−1

XtP = (1 + r)APt + YtP

s.t. CtS = XtS − ASt+1

ṼtK XtK + Gt , APt+1 , ZtP , ZtK = max u CtK + βWt+1

s.t. CtK = XtK + Gt − AK

The parent’s problem is

VtP XtP , XtK , ZtP , ZtK = u CtP + ηu C̃tK + βWt+1

s.t. CtP = XtP − Gt − APt+1

VtK XtP , XtK , ZtP , ZtK = ṼtK XtK + G∗ , A∗ , ZtP , ZtK

G∗i = a + bp XiP + bk XiK + α1 ZiP + α2 ZiK + δage + i , (10)

Meanj,t = βjMean + γtMean + Mean