A dynamic model of altruistically-motivated transfers Articles uri icon

publication date

  • April 2014

start page

  • 303

end page

  • 328

issue

  • 2

volume

  • 17

international standard serial number (ISSN)

  • 1094-2025

electronic international standard serial number (EISSN)

  • 1096-6099

abstract

  • This paper studies a dynamic Markovian game of two infinitely-lived altruistic agents without commitment. Players can save, consume and give transfers to each other: We identify a continuum of equilibria in which imperfectly-altruistic agents act as if they were a perfectly-altruistic dynasty which is less patient than the two agents themselves. In such equilibria, the poor agent receives transfers until both effectively pool their wealth and tragedy-of-the-commons-type inefficiencies occur. We also provide a sharp characterization of strategic interactions in consumption and transfer behavior. This provides new insights relative to existing two-period models. It allows us to differentiate between the Samaritan's dilemma - e.g. a child runs down its assets inefficiently fast in anticipation of transfers - and what we refer to as the Prodigal-Son dilemma - e.g. parents do not leave an early bequest, anticipating a child's profligate behavior. (C) 2013 Elsevier Inc. All rights reserved.

keywords

  • consumption-saving decisions; inter-vivos transfers; altruism; differential games; rotten-kid theorem; social-security; bequests; wealth