Bequests, Inter Vivos Transfers, and Wealth Distribution

This paper extends the heterogeneous agent overlapping generations model with bequests in Nishiyama (2000) by adding two-way intergenerational altruism and inter vivos transfers. Calibrating the model to the U.S. economy, the paper measures time preference and intergenerational altruism consistent with the economy¶s capital-output ratio and the sizes of intergenerational transfers. In the model, households in the same dynasty play a Nash game in each period to determine their optimal consumption, working hours, inter vivos transfers, and savings. The model suggests that when deciding the level of bequests, a parent household considers the future utility of its child households, on average, about 20 percent less than it considers its own future utility. But, the parent household¶s motive for inter vivos transfers is much weaker than its motive for altruistic bequests. The model replicates the wealth distribution of the United States fairly well in terms of the Gini coef¿cient although the top 1 percent of the population holds proportionately less wealth than is observed in the data. The paper also analyzes the effect of intergenerational transfers on wealth accumulation and distribution.