Dynamic Aspects of Family Transfers

Parents appear more motivated to help their less fortunate children than to treat all of their children equally.

In Dynamic Aspects of Family Transfers (NBER Working Paper No. 18446), Kathleen McGarry examines data on 17 years of transfers between parents and their adult children and finds that parents evaluate their children's income prospects before making gifts. When those prospects dim, especially after a reversal such as the loss of a job or a divorce, parents are willing to kick in money to ease the situation.

"Transfers made in conjunction with specific events in the child's life appear to be important and suggest that parents frequently respond to negative shocks to the child's income," she writes. McGarry also finds that gifts to adult children both vary over time and differ across children in the same family. In directing their gifts, parents appear more motivated to help their less fortunate children than to treat all of their children equally.

Previous studies have found that in any given year, parents give their adult children an estimated $65 billion (in 2010 dollars). Some of these studies suggested that the flows could be explained by an altruism model, which predicts that parents give more to their neediest children. Other studies seemed to suggest that the exchange model, which says that parents pay for services rendered by their children, is what is at work. McGarry develops a dynamic model of parental altruism, built around the idea that a parent's expectations of a child's income change over time and that giving changes with it. She points out, however, that some giving appears motivated by factors outside this model.

Drawing on data from the Health and Retirement Study from 1992 to 2008, she provides some of the first evidence on how parental giving varies over time. For example, approximately 14 percent of the children in her sample of 3,776 families received a cash transfer from their parents in a particular two-year period, but only 6 percent received a transfer in two adjacent surveys. Similarly, nearly half of the children (46 percent) received a transfer in one of the nine biennial surveys, but less than 1 percent reported receiving a transfer in all of those periods. Moreover, the period-to-period changes in transfers were strongly correlated with changes in the child's income.

The gifts to children within a family didn't average out over time. Those with the smallest current income, and those with low permanent income, tended to get the largest amounts from parents.

McGarry also finds evidence that parents give for positive developments in a child's life. Those who completed their sixteenth year of schooling between two surveys (and thus who likely graduated from college) received approximately $500 more than those who did not. Those who married between one survey and the next had a roughly 30 percent greater probability of getting a transfer than their counterparts who did not. The birth of a grandchild offered the biggest bonus of all. The parent of a grandchild reported an average transfer of $5,758, more than $1,500 greater than the average of $4,236 for those who didn't report a new child.

Some of the largest transfers came after negative events that affected a child's income. The loss of a job resulted in an average transfer of $5,257, the largest of any life event except the birth of a grandchild. Those who went through a divorce had a 61 percent greater probability of receiving money from parents than those who didn't get divorced.

--Laurent Belsie