Tough love and Intergenerational Altruism

This paper develops and studies a tough love model of intergenerational altruism. We model tough love by modifying the standard altruism model (Barro, Becker 1974) in two ways. First, the child’s discount factor is endogenously determined, so that low consumption at young age leads to a higher discount factor later in her life. Second, the parent evaluates the child’s life time utility with a constant high discount factor. One of the main findings of the paper is that the comparative static result from a change in an exogenous variable in the tough love model can be obtained by the standard altruism model with a certain parametric configuration. However, this observational equivalence is broken when the child is liquidity constrained and when the child’s discount factor changes exogenously. In contrast to the ∗We thank Shinsuke Ikeda for his initial collaboration, Dean Lillard for many comments and discussions from the initial stage of this research, and seminar participants at Ohio State University for comments. †Fourth Year PhD Student, Department of Economics, Ohio State University ‡Professor, Department of Economics, Ohio State University predictions of the standard altruism model that transfers from parents are independent of exogenous changes in the child’s discount factor, our tough love model predicts that transfers will fall.