Tough love for lazy kids: Dynamic insurance and equal bequests

Abstract

This paper develops a dynamic insurance model to explain a central puzzle in intergenerational transfers: gifts partially compensate children for negative income shocks, but bequests are typically divided equally. In the model, parents use gifts (early in life) and bequests (later in life) to provide insurance against income shocks, but take into account that children would shirk if offered large transfers. We show in a simple model that parents can provide better incentives later in life by giving equal bequests. In a quantitative model, gifts are compensatory while bequests are nearly uncorrelated with income and approximately equal in most families.