Parental human capital investment and old-age transfers from children: Is it a loan contract or reciprocity for Indonesian families?

Abstract

This paper proposes two alternative models of intergenerational transfers linking parental investment in human capital of children to old-age support. The first model formulates these transfers as a pure loan contract and the second model as self-enforcing reciprocity. Both models predict neutrality of intergenerational redistribution of resources within the family, also known as the “difference in income transfer derivatives property”. Two models, however, provide different reasons for the failure of this property, and yield different policy implications for parental human capital investment and provision of old-age support. Specification tests on the Indonesian Family Life Survey data reject the pure loan model in favor of the reciprocity model. The estimated difference in income transfer derivatives for this data is found to be significantly higher than the difference estimated by Altonji, Hayashi and Kotlikoff Altonji et al. (1992) [Altonji, J.G., Hayashi, F. and Kotlikoff, L.J. (1992). Is the Extended Family Altruistically Linked? Direct Tests Using Micro Data. The American Economic Review, vol. 82(5): 1177–98.] for the U.S. PSID data.