Equilibrium and Efficiency in Intergenerational Transfers

Abstract

The focus of our study concerns a family consisting of two altruistic agents, the parent and the child. The model is cast within a two period framework where, in the first period, the parent decides on the allocation of his resources between consumption and investment in the human capital of his child, and, in the second period, the child has to decide how much of his (acquired through the parent’s transfer) wealth to give away for the support of his parent. Our first result establishes that the outcome of the game of transfer is inefficient; then we proceed by investigating possible means of attaining efficiency; finally, we analyze the impact of uncertainty regarding child’s preferences on the game equilibrium.