Edited by Luigino Bruni and Pier Luigi Porta
Chapter 18: On the Demand for Grandchildren: Tied Transfers and the Demonstration Effect
Donald Cox and Oded Stark
18 On the demand for grandchildren: tied transfers and the demonstration eﬀect* Donald Cox and Oded Stark† 1. Introduction A ﬁfth of all ﬁrst-time homebuyers in the United States receive help with their housing purchases from relatives, mainly parents. This help is substantial, averaging over half the required downpayment (Engelhardt and Mayer 1994). Parental assistance with housing downpayment is an example of a private transfer earmarked for the purchase of a particular good, that is, it is a ‘tied transfer’. Such transfers, though common, pose a diﬃculty for theories of private transfers. Theories of altruistic giving predict that a parent can do no better to enhance the well-being of the recipient child than to give cash with no strings attached. Any other monetary transfer could impose on the child a utility-depressing constraint. Theories of exchangerelated giving, where the transfer is payment for future child services, similarly predict that the child would prefer cash. It is an eﬃcient means of remuneration, leaving the child free to acquire his most preferred consumption bundle. Several ideas have been advanced to explain tied transfers. One idea is that preferences are ‘paternalistic’, in the sense that donors care about the composition of the recipient’s consumption. Another idea is that although tied transfers need not be paternalistic, altruistic parents give their children illiquid assets, such as education and housing, to prevent the children from overconsuming and being in perpetual need of parental assistance. A third idea is based on liquidity constraints. Adult children...
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