Inter-vivos transfers and exchange.

• Author: Norton, Edward C.
• Position: Link between informal care and economic motives

1. Introduction

   Economists have long looked for evidence of exchange or altruism as a motive for bequests. Altruism is when parents equalize their children's marginal utility of wealth by giving more bequests to their poorer children (Wilhelm 1996; Altonji, Hayashi, and Kotlikoff 1997; Sloan, Zhang, and Wang 2002). Exchange is when parents give more bequests to the child or children who provide more informal care and attention. The theoretical literature on bequests argues that exchange is an important motivation for bequests (Bernheim, Schleifer, and Summers 1985; Bernheim 1991). The empirical evidence, however, is mixed, with some papers finding bequests positively associated with attention (Bernheim, Schleifer, and Summers 1985; Bernheim 1991) and others not finding evidence of exchange (Sloan and Norton 1997; Perozek 1999). Recently, economists have turned their attention from bequests to inter-vivos transfers and have found mixed evidence of altruism (Altonji, Hayashi, and Kotlikoff 1997; McGarry and Schoeni 1997; McGarry 1999).

   Any economic theory about exchange needs to explain three stylized facts. First, most bequests are divided equally (Menchik 1980; Tomes 1981; Norton and Taylor 2005), even among wealthy decedents (Wilhelm 1996). Second, unlike bequests, inter-vivos transfers are much more likely to be divided unequally among children. Third, a major source of attention to elderly parents, informal caregiving falls disproportionately on some children. The remarkably different pattern of giving between inter-vivos transfers and bequests--primarily unequal or primarily equal--suggests that the strategic interaction between parents and children might be different for these two methods of passing wealth to the next generation.

   Why should inter-vivos transfers have such a different pattern than bequests? We argue that there are compelling reasons why exchange is a common and important motivation for inter-vivos transfers and, furthermore, that exchange is a better strategic incentive when done through transfers than through bequests.

   We test our hypotheses by estimating whether children of parents who make any transfers are more likely to receive a transfer if they provide informal care and whether parents who receive informal care are more likely to plan to divide their bequests unequally among their children. Informal care provides a good test for exchange because, unlike some measures of attention, it involves a serious commitment on the part of children in time and effort and varies among children within a family. We use data from the Asset and Health Dynamics Among the Oldest-Old Panel Survey (AHEAD) because it has information on both parents and children and about transfers, intended bequests, informal care, and finances. Informal care is endogenous because forward-thinking children will decide how much informal care to provide simultaneously with their parents deciding on transfers and bequests. We test and control for the endogeneity of informal care. The model is identified through variation in the amount of informal care provided by children in families.

   Our results support exchange as a motivation for inter-vivos transfers, but not for intended bequests. A child who helps with activities of daily living or instrumental activities of daily living is far more likely to receive a transfer of at least $500 in a year than a sibling who does not provide help. Our test has the advantage over previous tests of using child-level data matched to parents' data; this allows us to test for differences in informal care within families.

2. Background

   Exchange has great intuitive appeal as a motive for inter-vivos transfers because elderly persons often have a need for informal care, a desire for attention from their children, and wealth to transfer. Exchange is not the only motive for inter-vivos transfers of course; other reasons include altruism, precautionary savings, the joy of giving, and familial obligations (Cox and Soldo 2004). We explicitly test for exchange in this paper, which does not inform us about these other motivations for inter-vivos transfers.

   Inter-vivos transfers from parents to children are common in the United States. Although the exact extent is notoriously difficult to estimate, inter-vivos transfers are believed to be at least one-third of all intergenerational transfers (see Gale and Scholz 1994 for a review). Wilhelm (1996) estimates that hundreds of billions of dollars are bequeathed each year in the United States, implying that inter-vivos transfers could be upwards of a hundred billion dollars per year. In a study of nonelderly parents and children in the 1988 Panel Survey of Income Dynamics, Altonji, Hayashi, and Kotlikoff (1997) found that 20% of children received a transfer of $100 or more in a year's time and that the mean transfer was $297. Using a nationally representative sample of the elderly (AHEAD), McGarry (1999) found that 25% of families made a cash transfer to at least one child. The mean transfer was $3013 over the past 10 years. Also using AHEAD, we find that transfers tend to be made unequally among children. Over 60% of parents who made inter-vivos transfers did so unequally, meaning that at least one child received money and at least one did not. This estimate is conservative because we counted a transfer as equal when all children received some transfers, not knowing if the actual size of transfers was equal. Using a frail subsample from AHEAD, Henretta et al. (1997) found that, for a variety of family sizes, large transfers--$5000 or more--are also unequal.

   Informal care is also very common, in fact, informal care is the most common type of long-term care for American elderly, with about 22.4 million households providing informal care today to persons over age 50 (Family Caregiver's Alliance 2001). The most important source of informal care, besides spouses, is children (Spector et al. 2000). It is common for one child in a family to provide informal care while siblings provide none (Van Houtven and Norton 2004). Children who have a low opportunity cost of their time--low-income children, children who do not work, children who are already caring for other dependents, or children who live close by--are the most likely providers. Daughters are more likely to have a low opportunity cost of time than sons and are more often caregivers.

   Informal Care and Exchange

   Informal care may be a common form of exchange to elderly parents--children provide care when the utility of caregiving exceeds the utility of not giving care (Nocera and Zweifel 1996), and some of that utility might come from compensation from a parent (Norton 2000). Parents rarely pay children directly for their assistance, but monetary or nonmonetary transfers could depend on care provided. Nonmonetary transfers are more difficult to measure but could include transfers of belongings such as furniture, cars, or even the title to one's home. Monetary transfers can include stocks, other assets, or cash transfers. Inter-vivos transfers have tax advantages compared with bequests, although the financial incentives for giving apply equally to all children (Poterba 2001; Bernheim, Lemke, and Scholz 2004).

   Clearly, children also can engage in exchange by providing informal care for intangible gains, not only for present or future monetary rewards. Caregiving is physically and emotionally difficult, and although bequest amounts could eventually be substantial, annual monetary transfers from parents are usually much less than what a child would earn in a full-time minimum-wage job. Some of the intangible utility gains of caregiving might include relief that a parent can remain in her own home as desired, satisfaction at being able to repay a parent for some of the effort it took to raise the child, happiness associated with a closer relationship with a parent, fulfilling different cultural norms about the way elders should be treated, or setting an example for their children (grandchildren of the elderly parent) for how the adult child would like to be treated eventually.

   Nevertheless, exchange for monetary transfers could be vital to children. At the margin, receiving monetary transfers might help reassure a child that they are doing the right thing. It might alleviate the stresses of caring for a parent or the financial sacrifice of being a caregiver, or it could in some other way induce a child to continue to provide care.

   Motives behind Inter-vivos Transfers

   Of the several empirical studies of motives for inter-vivos transfers, only some examine informal care. Cox (1987) uses data from 1979 on intergenerational households to test how a child's income affects both the probability and amount of transfer received. Although he finds evidence in support of exchange, he is not able to measure directly whether increased care and attention affects transfers. Altonji, Hayashi, and Kotlikoff (1997) looked at transfers to nonresident children among parents already actively making transfers, controlling for unobserved family heterogeneity and sample selection bias. They soundly rejected the altruism hypothesis because, although parents increase their transfers when their own income goes up, consistent with altruism, parents reduce their transfers by only a few cents for each extra dollar of income their child has. They did not examine exchange, although a more recent study by the same authors (Altonji, Hayashi, and Kotlikoff 2000) examines time and money transfers exchanged both ways between parents and children. They find little evidence that time transfers are exchanged for money in either direction or that income or wealth increases money transfers.

   Henretta et al. (1997) used AHEAD to study whether past transfers increased current caregiving--the opposite relationship that we study. They also used family fixed effects models to exploit within-family variation in past transfers and current...