Bequest motives in a life-cycle model with intergenerational interactions

This paper revisits the debate on altruism vs exchange motive for bequest and studies to what extent the saving behavior of elderly Europeans is di↵erent in the presence or absence of adult children. To this purpose, we develop a structural model with two overlapping generations, namely elderly parents and their adult children. For each generation, we formulate a separate lifecycle model in which individuals consume and save. Children care about their elderly parents’ health and may choose to support them via money transfers and time assistance. Parents, on the other hand, must cover the health costs resulting from heterogeneous health and medical spending shocks, and they can do so via formal insurance (purchased beforehand), informal insurance (provided through time and money transfers by their children) and out-of-pocket. We join the two lifecycle models in a dynamic game between parents and children, which we show has a unique Markov perfect equilibrium. We estimate the model on SHARE data using the simulated method of moments. Preliminary results show a significant bequest motive for savings in Europe. In an altruistic world, children have a considerable incentive to provide both time and financial help, and this greatly impacts the parents’ savings behavior. Moreover, health, medical spending and health insurance also appear to be crucial in determining the old age saving patterns. Finally, counterfactual experiments show that considering only the strategic motive for bequest cannot explain the slow wealth decumulation in old age or the children’s transfers patterns.