Wealthy kids are usually wealthy because their wealthy parents left them a lot of money. You might think that’s because parents are altruistic towards their kids. Indeed every dollar bequeathed is a dollar less of consumption for the parent. But think about this: if parents are so generous towards their kids why do they wait until they die to give them all that money? For a truly altruistic parent, the sooner the gift, the better. By definition, a parent never lives to see the warm glow of an inheritance.
A better theory of bequests is that they incentivize the children to call, visit, and take care of the parents in their old age. An inheritance is a carrot that awaits a child who is good to the parent until the very end. That’s the theory of strategic bequests in Bernheim, Shleiffer and Summers.
But even with that motivation you have to ask why bequests are the best way to motivate kids. Why not just pay them a piece rate? Every time they come to visit they get a check. If the parent is even slightly altruistic this is a better system since the rewards come sooner.
To round out the theory of strategic bequests we need to bring in the compound value of lump-sum incentives. Suppose you are nearing the bitter end and its likely you are not going to live more than another year. You want your kids to visit you once a month in your last year and that’s going to cost you 12*c where c is your kid’s opportunity cost per weekly visit. You could either implement this by piece-rate, paying them c every time they come, or in a lump sum by leaving them 12c in your will if they keep it up the whole time.
But now what happens if, as luck would have it, you actually survive for another year? With the piece rate you are out 12c and still have to cough up another 12c if you want to see your kids again before you die. But a bequest can be re-used. You just restart the incentives, and you get another year’s worth of visits at zero additional cost.
Is it credible? All you need is to commit to a policy that depends only on their devotion in the last year of your life. Since you are old your kids know you can’t remember what happened earlier than that anyway so yes, it’s perfectly credible.
(Idea suggested by Mike Whinston.)
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February 27, 2012 at 12:26 pm
David Pinto (@StatsGuru)
My dad tends to take the give it away now route with us. Every time my daughter visits him, he gives her a check. If my sister or myself incur a large expense, he usually sends us a check. As he says, he’d rather give it away now than have uncle Sam take it.
As far as keeping the money, in general, you don’t know how long you will live and how much it might cost you. It would not be a good idea to go broke giving your money away, then find you need it to be comfortable in your final days.
February 27, 2012 at 8:09 pm
brian
i like the post, but i think david’s risk aversion explanation is the simpler explanation here. it is testable though — i’m sure there is measurable variation in parents’ uncertainty over their remaining length of life. when people get diagnosed with terminal cancer do their kids start getting richer right away?
February 28, 2012 at 2:27 am
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February 28, 2012 at 9:14 am
Anonymous
In my husband’s family, elderly women learned to manipulate the younger generation by repeatedly changing their wills. Hilarity results when a death occurs and the will was set in the off position for the sons of one lady.
Very expensive: legal bills, police accusations/investigations and bad feelings that ensue.