Intergenerational transfers, production and income distribution

Abstract

We consider an overlapping-generations economy where the aggregative production process uses physical capital and human capital. Intergenerational transfers from parents to their children are motivated by ‘altruism’. We distinguish between two types of transfers: Investment of parents in the education of their offspring, and capital transfer (the ‘gift-bequest motive’). We show that the intensity of each type of altruism, and hence the composition of the two types of transfers, affect significantly the equilibrium output and the intragenerational income distributions. Comparing competitive equilibria, from the same initial distributions of capital transfers and human capital, we derive: (a) The economy with the higher ‘education-inclined’ altruism attains lower output and more equal intragenerational income distributions, if either the production function’s elasticity of substitution is not ‘large’ or the altruism is ‘weak’ (b) For more ‘bequest-inclined’ altruism the effects are, usually, reversed (c) Under public provision of education, higher (bequest-inclined) altruism results in lower output and less equal distribution of income in all dates.