Abstract
The effects of interactions between private transfer behaviour and income redistribution policies depend on the motives underlying private income transfers. This paper tests for two different potential motives: pure altruism versus simple exchange, in the presence of capital market imperfections. Using household survey data for Bulgaria, microeconometric evidence is found that both motives are in effect. We also find evidence that capital market imperfections are likely to be binding for consumption smoothing, and hence are an important cause of private transfers. The results indicate that social security benefits "crowd out" the amount of private transfers received but not the incidence of private transfers. Finally, private transfers play an important role as a safety net as they significantly decrease poverty rates and the inequality of income distribution.
Highlights
In the presence of operative inter-household private transfers, the effects of income redistribution policies become uncertain and dependent on the motives underlying inter-household private transfers
We provide microeconometric evidence on inter-household private transfers for Bulgaria and use our results to evaluate the empirical relevance of the altruism model and of the exchange model of inter-household private transfer behaviour
Our results suggest that capital market imperfections bind for consumption smoothing, in the sense that households experience a likelihood of being net receivers according to a U-shaped pattern over their life cycle
Summary
In the presence of operative inter-household private transfers, the effects of income redistribution policies become uncertain and dependent on the motives underlying inter-household private transfers. Becker (1974; 1993) shows that if inter-household private transfers are operative and are an outcome of altruistic feelings satisfaction, households can completely neutralize the effects of income redistribution policies, by adjusting the levels of their transfers (see Altonji, Hayashi and Kotlikoff, 1997). If one is interested in anticipating the outcome of a given income redistribution policy, one must understand the motives behind inter-household private transfers. This paper tests the empirical relevance of two hypotheses – the altruism hypothesis and the exchange hypothesis – which have been accepted in the literature as the main driving forces behind inter-household private transfers (see Cox et al, 1998). It is important to test which motive dominates at an empirical level in order to anticipate the outcome of a given income redistribution policy.
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