The Marginal Propensity to Spend on Adult Children

Abstract

We examine how much of an extra dollar of parental lifetime resources will ultimately be passed on to adult children in the form of inter vivos transfers and bequests. We infer bequests from the stock of wealth late in life. We use mortality rates and age specific estimates of the response of transfers and wealth to permanent income to compute the expected present discounted values of these responses to permanent income. Our estimates imply that parents pass on between 2 and 3 cents out of an extra dollar of expected lifetime resources in bequests and about 2 cents in transfers. The estimates increase with parental income and are smaller for nonwhites. They imply that about 15 percent of the effect of parental income on lifetime resources of adult children is through transfers and bequests and about 85 percent is through the intergenerational correlation in earnings, although these estimates are sensitive to assumptions about the intergenerational earnings correlation, taxes, and the number of children. We compare our estimates to the implications of alternative computable benchmark models of savings behavior in order to assess the likely importance of intended bequests for the wealth/income relationship.