Growth and Intergenerational Debt

The aim of this study is to extend our knowledge of the nature of intergenerational transfers between parents and children. The paper develops the model that captures parents` two separate motives for transfers to children: altruism towards their children and “parental repayment hypothesis” with bequests replaced by implicit debt contracts between parents and children with endogenous rate of return. Using a three-period OLG model, we found that, firstly, private intergenerational transfer is inefficient; secondly, publicly funded social security system may be welfare enhancing; finally, calibration to the Philippines data show the reasonable level of rate of return, but higher optimal tax rate than the Philippine economy had from 1980 to 2000. This paper suggests the reason of the fact that parents invest in children’s education in developing countries followed by upwards transfers from adult children to elderly parents. It proposes that parent`s decisions to invest in human capital of their children is motivated by two separated motives: altruistic motive, because parents want ``a better life`` for their children that could be provided by education and self-interest that return to children`s education that generates transfer to the elderly parents, because of the reliance of parents on their children for support in old age. The model is expected to be useful to assess the effects of the social security system, the conditions of technology and preferences and shocks to the variables in countries without fundamental technological growth such as primitive hunter-gathering societies or more advanced de-trended economies with underdeveloped social security system. The result is expected to shed light on how the family support system will respond to government programs targeted to improvement of welfare.