Economics Seminar Series

Sean Fahle, University at Buffalo, Department of Economics

Why do People Leave Bequests? A Quantitative Exploration

Dr Sean Fahle.

Prof. Sean Fahle

A longstanding puzzle has been to understand the reasons for which people leave bequests. Furthermore, we ask why inter-generational transfers flow mainly in the form of bequests and not as inter-vivos transfers. This paper provides a quantitative answer to both of these questions. We first document a set of facts on bequests and old-age savings in the Health and Retirement Study. We find evidence suggesting that the following four factors are important for determining bequests: (i) longevity risk, (ii) altruism, (iii) exchange and (iv) illiquid housing. We then build and calibrate a rich model that allows us to study the importance of these factors. Our no-commitment setting explains why parents delay most (but not all) transfers until their death: By holding on to their wealth, they have more of say on the allocation of resources. We find that no single bequest motive is sufficient to rationalize the patterns in the data. The two channels that matter most per se are longevity risk and homeownership. However, the different motives interact in novel ways that can only be understood in a dynamic framework. For example, altruism may actually decrease bequests: When parents can count on an altruistic child to help out in times of disability, then they decrease their precautionary savings, leading to lower bequests.

Friday, April 6, 2018
3:30pm – 5:00pm
Fronczak 444
Small reception to follow in Room 426. All are invited to attend.