List of Illustrations........................................................ix List of Tables.............................................................xiii Acknowledgments..............................................................xv 1 The Argument for Parental Priorities.......................................1 Altruistic Parental Priorities...........................................2 Two Models of Opportunity and Intergenerational Mobility.................3 How Altruism is Influenced by Economic Status............................3 Evidence on the Dynamics of Economic Inequality..........................4 Arguments from Other Disciplines.........................................6 Other Implications of Endogenous Altruism................................6 Choice and the Economic Approach.........................................7 On the Methodology of Endogenizing Preferences...........................9 Part 1 Modeling Altruism and Intergenerational Mobility 2 Indifference Curve Diagrams as Models of Parental Priorities..............13 Altruism................................................................14 Timing of Parental and Child Consumption................................14 Indifference Curve Diagrams.............................................16 Intergenerational Altruism..............................................18 Altruism and Economic Status............................................19 Summary.................................................................21 3 Two Models of Opportunity and Intergenerational Mobility..................23 Introduction............................................................23 The Permanent Income View of Intergenerational Mobility.................26 Economic Opportunities with Exogenous Earnings.....................26 The Transmission of Inequality with Exogenous Earnings.............30 Opportunities and Inequality with Parental Investments in Children.38 Review of the Main Points..........................................44 The Imperfect Capital Markets View......................................45 Opportunities with an Intergenerational Borrowing Constraint.......47 Transmission of Consumption Inequality.............................48 Transmission of Earnings Inequality................................54 Human Capital, Ability and Family Background.......................55 Are the Permanent Income and Imperfect Capital Markets Models Different?....................................................57 Review of the Main Points..........................................62 Appendix A: A Two Period Mathematical Model of Intergenerational Mobility...........................................................64 4 How Altruism is Influenced by Economic Status.............................72 Intergenerational Substitution Effects in the Theory of Altruism........73 The Formation of Altruism...............................................76 Definition of Child-Oriented Resources.............................76 The Effect of Altruism on Preferences..............................84 "Total Resource" and "Substitution" Effects in the Permanent Income Model..................................................85 Complementarity between Child-oriented Resources and a Child's Consumption...................................................90 Parental Income and Substitution Effects in the Borrowing Constraints Model.............................................96 Intergenerational Mobility with Endogenous Altruism...............101 The Quantity and Quality of Intergenerational Altruism.................106 Intergenerational Mobility and Preferences for Per Capita Consumption..................................................109 How is Fertility Related to Family Income?........................110 Aggregate and Per Capita Formulations of the Becker-Barro Model...112 Additional Results................................................119 A Model of Fertility and Child-Oriented Resources.................119 Review of the Main Points..............................................121 Predictions of the Models.........................................121 A Theory of Preference Formation?.................................123 Appendix B: Two Mathematical Models of the Formation of Intergenerational Altruism........................................124 Appendix C: More on "total resource" and "substitution" effects........133 5 Taxation and Intergenerational Mobility in the Three Models..............137 Estate and Gift Taxation...............................................138 Flat-rate Taxes...................................................138 Graduated-Rate Taxes..............................................139 Summary of Theoretical Results....................................145 Income Taxation........................................................145 Flat-rate Taxes...................................................145 Graduated-Rate Taxes..............................................147 Summary of Theoretical Results....................................151 Overview of the U.S. Estate, Gift, and Income Taxation.................151 Federal Estate and Gift Taxes.....................................152 Federal Income Taxes..............................................155 Summary of the Relevant Features of U.S. Federal Estate, Gift, and Income Taxes.............................................157 Review of the Main Results.............................................157 Part 2 Empirical Arguments for Modeling Altruism 6 The Evolution of Economic Inequality in the U.S..........................163 Introduction...........................................................163 Links Between Intergenerational Mobility and the Evolution of Inequality........................................................164 Parental and Other Influences.....................................165 and the Evolution of Inequality.................................167 Galton's Fallacy and Inequality Across Groups.....................168 Measurement Errors and the Evolution of Inequality................169 Immigration, Intragenerational Mobility, and the Evolution of Inequality...................................................170 Cross-family Inequality................................................171 Wealth Inequality.................................................171 Earnings Inequality...............................................174 Consumption Inequality............................................176 Racial Inequality......................................................177 Cross-region Inequality................................................180 Cross-country Inequality...............................................181 A Unified Approach.....................................................182 Review of the Main Points..............................................183 7 The Intergenerational Dynamics of Consumption, Earnings, Income, and Wealth........................................................186 Introduction...........................................................186 Intergenerationally Linked Data from the PSID..........................188 Data Description..................................................188 Intergenerational Samples Used in the Empirical Analysis..........189 Measurement of Consumption........................................191 PSID Results...........................................................193 Results from other Data Sources........................................199 Schooling.........................................................200 Earnings..........................................................201 Family Income.....................................................205 Family Wealth.....................................................207 Family Consumption................................................211 Occupation........................................................211 Review of the Main Results.............................................213 Four Strongly Supported Conclusions...............................214 Two Tentative Conclusions.........................................218 Appendix D: Some PSID Results with an Alternative Measure of Consumption.......................................................218 8 Borrowing Constraints and the Persistence of Inequality..................220 Two Data Sources.......................................................226 Simple Regression Results for Consumption..............................232 Analysis of Selection Bias.............................................233 Maximum Likelihood Estimates......................................234 Pooled vs. Separate Regressions...................................235 Growing Consumption Inequality in the Two Groups..................235 Simple Regression Results for Wages....................................237 Inheritance and Earnings Inequality....................................239 Results from other Data Sources........................................241 Parents Do Borrow Against the Earnings of Children................241 Intergenerational Mobility Within and Across Groups...............242 Cross-Country Comparisons of Intergenerational Mobility...........242 Probate Records...................................................243 Review of the Main Results.............................................246 Appendix E: Likelihood Functions Used in the Statistical Analysis.....248 Appendix F: Summary Statistics for PSID Samples.......................251 Part 3 Arguments from other Disciplines 9 The Biological Origins of Altruism.......................................259 On Evolutionary Reasoning and Economic Analysis........................259 An Altruism Function Derived From Evolutionary Reasoning...............263 The Discriminating Altruist Corollary.............................263 Kin Selection and the Rate of Return to Altruism..................265 Rotten Kids and the Rate of Return to Altruism....................267 Summary................................................................268 10 Classical Discussions of Altruism.......................................269 Altruism is Formed as the Result of Costly Actions.....................269 Altruism Increases with Schooling?.....................................271 Smith Derives the "Interest Rate Effect"...............................272 Summary................................................................272 11 Intergenerational Altruism and Inequality within the Family.............277 Accumulating Altruism For Several Children.............................278 Statement of the Full Problem.....................................278 Setup of the Second Stage Problem.................................278 Total Resource, Interest Rate, and Substitution Effects...........286 "Relative Price of Giving" Effect.................................287 "Relative Price of Caring" Effect.................................288 "Relative Happiness" Effect.......................................289 Do Parents Mitigate or Aggravate Inequality within the Family?.........292 Mitigation of Inequality in the Standard Model....................292 Endogenous Altruism Tends to Aggravate Inequality.................293 Interpreting Evidence on Family Transfers.........................294 Altruism and Insurance in the Family..............................296 The Beggar's Strategy.............................................296 Divorce, Parental Altruism and Child Welfare...........................297 Price of Paternal Giving - Exogenous Altruism.....................299 Paternal Altruism Formation.......................................301 Other Applications................................................302 Review of the Main Results.............................................302 Appendix G: A Mathematical Model of Altruism with Several Children....303 Part 4 Other Applications of Endogenous Altruism 12 Altruism and Giving Beyond the Family...................................306 Government Transfers and Parental Altruism.............................307 Education Subsidies...............................................307 Government Guaranteed Consumption for Children....................309 Combined Effects of Spending and Tax Programs.....................311 Private Charities and Endogenous Impure Altruism.......................311 Free-riding in Private Charities..................................312 Endogenous Pure and Impure Altruism...............................312 Predictions for the Financing of Public Goods.....................317 Charitable Giving Over Time............................................318 Summary of the Main Results............................................319 Appendix H: A Mathematical Model of Pure and Impure Altruism..........320 13 Altruism and the Principal-Agent Problem................................323 The Standard Principal-Agent Problem...................................323 Examples..........................................................323 Computation of the Optimal Compensation Scheme....................324 The Principal-Agent Problem with Endogenously Loyal Agents.............326 Corporate Loyalty and Executive Compensation...........................327 Review of the Main Results.............................................329 Appendix I: A Mathematical Model of Altruism and the Principal-Agent Problem...........................................................329 14 Conclusions.............................................................332 A Model of the Formation of Parental Priorities........................332 A Theory of Intergenerational Mobility.................................333 Failures of Existing Economic Models...................................334 Other Implications of Endogenous Altruism..............................336 Problems With Altruism as a Motive for Human Behavior..................336 Future Research on Altruism and Intergenerational Mobility.............338 Testing Other Implications of the Theory..........................338 New Models of Intergenerational Mobility..........................339 New Models of Intergenerational Altruism..........................340 New Data Sources..................................................341 A Guide to Mathematical Notation............................................343 References..................................................................349 Index.......................................................................361
© copyright 1997 by The University of Chicago