Endogenous division rules as a family constitution: strategic altruistic transfers and sibling competition

Abstract

Based on the notions of parental altruism, sibling competition, and family constitution, we present a self-enforcing model where heterogeneous children have economic incentives to supply family-specific merit goods (e.g., companionship) to their parents for securing inheritable wealth and the altruistic parents decide on division rules according to an optimizing behavior. In our analysis of intergenerational cooperation and intragenerational competition, the altruistic parents care about the efficiency of the children-provided merit goods and the equity of the children’s incomes. For an optimal allocation of wealth, the parents strategically partition it into two pools: one to be distributed equally whereas the other unequally according to their children’s supply of merit goods. We look at motivation of the parents in allocating their wealth to the two different pools. The analysis of endogenous division rules has implications for the compatibility between equal postmortem transfers and unequal inter vivos gifts, both of which are consistent with parental altruism.