Parental transfers under ambiguity

Abstract

ABSTRACT This note introduces parental uncertainty into parent–child monetary transfers. A parent questions the probability distribution of a child’s future economic success. As a result, the parent endogenously tilts his/her subjective probability model away from an approximating probability model. In this case, parental transfers increase with model uncertainty, thereby reducing the child’s effort and probability of economic success. This theoretical result raises several empirical questions, of which two are as follows. For one thing, informed parents (e.g. those who hold the same job as their child) transfer less money, and their child exerts more effort. Another is that economic uncertainty (e.g. recessions or pandemics) prompts higher parental transfer payments and reduces the child’s effort.