New Releases by Laurence J. KOTLIKOFF

What is the basic economic decision-making unit? Is it the household or the extended family? This question is fundamental to economic analysis and policy design. The answer given by the Life Cycle and Keynesian models is that the economic unit is the household. According to these models, members of particular households act selfishly and do not fully share resources with extended family members in other households. Hence, altering the distribution of resources across households within the extended family will alter the consumption and labor supply of those households who acquire or lose resources. In contrast to the Life Cycle and Keynesian models, the altruism model implies that the extended family is the basic economic decision-making unit. According to this model the extended family is linked through altruism and, as a result, acts as if it fully shares resources. In the altruism model nondistortionary changes in the distribution of resources across households within the extended family will have no effect on the consumption or labor supply of any of its members. Despite its importance, the boundaries of economic decision-making units have not, to our knowledge, been examined directly with micro data. Stated differently, the altruism model has not been tested against the Life Cycle and Keynesian alternatives with such data. This paper uses matched data on parents and their adult children, contained in the Panel Study of Income Dynamics, to perform such a test. In essence our test asks whether the distribution of consumption and labor supply across households within the extended family depends on the distribution of resources across households within the extended family. Our findings provide quite strong evidence against the altruism model. The distribution of resources across households within the extended family is a highly significant (statistically and economically) determinant of the distribution of onsumption within the extended family. This finding holds for the entire sample as well as the subsample consisting of rich parents and poor children. In addition to showing that the distribution of extended family resources matters for extended family consumption, we test the life cycle model by asking whether only own resources matter, i.e., whether the resources of extended family members have no affect on a household''s consumption. Our results indicate that extended family member resources have, at most, a modest effect on household consumption after one has controlled for the fact that extended family resources help predict a household''s own permanent income.

In recent years the role of intergenerational transfers in the process of wealth accumulation has been the subject of substantial empirical and theoretical analysis. The key question stimulating this research is what is the main explanation for savings? Is it primarily accumulation for retirement as claimed by Albert Ando, Richard Brumberg, and Franco Modigliani in their celebrated Life Cycle Model of Savings? Is it primarily intentional accumulation for intergenerational transfers? Or is it primarily precautionary savings, much of which may be bequeathed because of imperfections in annuity markets? This paper examines a range of findings on the importance of intergenerational transfers. The strong conclusion that emerges from this evidence is that intergenerational transfers play a very important, if not a key, role in aggregate wealth accumulation. While intergenerational transfers figure very large in savings, the precise motivation for such transfers is unclear. Intergenerational altruism might appear the most likely candidate, but at least sane stylized facts, such as the equal allocation of bequests among children, are strongly at adds with the altruism model. Other explanations involving imperfect insurance arrangements or payments for child services do not appear capable of explaining the substantial amounts of transfers actually observed. Sorting cut the relative contributions of different models to intergenerational transfers and the precise role of intergenerational transfers in the process of wealth accumulation remains an intriguing and exciting enterprise

This paper presents the results of an experimental study of the life cycle model in which subjects were asked to make preferred consumption choices under hypothetical life cycle economic conditions. The questions in the experiment are designed to test the model''s assumption of rational choice and to elicit information about preferences. The subjects'' responses suggest a widespread inability to make coherent and consistent consumption decisions. Errors in consumption decision-making appear to be very substantial and, in many cases, systematic. In addition, the experiment''s data strongly reject the standard homothetic, time-separable life cycle model. The principal specific findings of the laboratory experiment are: (1) Subjects displayed significant inconsistencies in their consumption decisions; each of the subjects, in at least two pairs of economically identical situations, chose consumption values that differed by 20 percent or more. From the perspective of the standard life cycle model, error in decision-making accounts, on average, for roughly half of the variation in consumption. (2) A sizeable fraction of subjects undervalued future earnings relative to present assets; i.e., they systematically overdiscounted future earnings. (3) Almost all subjects exhibited oversaving behavior, apparently because they underestimated the power of compound interest. (4) The hypothesis that intertemporal consumption preferences are uniform across individuals is strongly rejected. Indeed, the demographic characteristics of subjects are significant determinants of consumption choice in the experiment

This paper uses historicaI U.S. data to directly estimate the contribution of intergenerational transfers to aggregate capital accumulation. The evidence presented indicates that intergenerational transfers account for the vast majority of aggregate U .S. capital formation; only a negligible fraction of actual capital accumulation can be traced u, life-cycle or "hump" savings. A major difference between this study and previous investigations of this issue is the use of more accurate longitudinal age-earnings and age-consumption profiles. These profiles are simply too flat to generate substantial lifecycle savings. This paper suggests the importance of and need for substantially greater research and data collection on intergenerational transfers. fife-cycle models of savings that emphasize savings for retirement as the dominant form of apical accumulation should give way to models that illuminate the determinants of intergenerational transfers.