Intergenerational Altruism and Transfers of Time and Money: A Lifecycle Perspective

Parental investments in children can take one of three broad forms: (1) Time investments during childhood that affect child ability (2) Educational investments (3) Cash transfers in the form of inter vivos gifts and bequests. Using panel data that covers a cohort of individuals from birth to retirement, we estimate a dynastic model of household decision-making with intergenerational altruism that nests a multi-period child production function and incorporates all three of these types of investments. We find that 28% of the variance of lifetime wages can already be explained by characteristics of the parents before individuals are born and 62% of the variance can be explained by age 23 characteristics of the individual. In terms of investments, we find evidence of dynamic complementarity between time and educational investments – the returns to education are higher for high ability individuals. This is a potentially important mechanism in perpetuating intergenerational outcomes, as borrowing constraints prevent low-income families from investing in education, thus simultaneously reducing the incentive to invest in time.