Economic growth and endogenous intergenerational altruism

https://doi.org/10.1016/j.jpubeco.2007.01.001Get rights and content

Abstract

The recent literature on the endogenous formation of preferences has emphasized that while some preferences are more conducive to growth than others, economic growth also contributes to the formation of particular tastes [Becker, Gary S. (1996): Accounting for Tastes, Cambridge, Ma.: Harvard University Press]. In this paper, we construct a neoclassical growth model where intergenerational altruism can be endogenously reinforced and entails costly sacrifices on the part of parents to acquire such trait. While the incentives to acquire altruistic traits depend on the economic conditions, in turn altruism determines the level of intergenerational bequests and ultimately the pace of capital accumulation and economic growth. It is shown that intergenerational transfers are driven by a natural degree of altruism at earlier stages of economic growth. Once individuals have satisfied their own physiological constraint in the course of economic development, they devote resources to shaping their altruistic preferences, increasing their social degree of altruism above its natural level. This in turn increases the share of intergenerational transfers and speeds up economic growth.

Introduction

The complex interdependencies between preferences and economic growth were well recognized by classical economists and philosophers. In their view, the institutions of a market economy (e.g., private property, individual responsibility) were desirable also because, beyond their expected outcome in terms of efficiency, these institutions were instrumental to the development of a set of preferences and attitudes that enhance economic prosperity and social harmony.1 Becker (1996) and Mulligan (1997) have pioneered a recent revival of these ideas. They explained that while some preferences are more growth-enhancing than others, economic growth also modifies the incentive structure faced by individuals when “choosing” their own preferences and contributes in turn to the formation and selection of particular tastes. The endogenous preferences formation approach was first applied to three types of preferences that have long been recognized as critical for growth: time preference (Becker and Mulligan, 1997, Michel and Vidal, 2003), the formation of parental altruism (Mulligan, 1997), and risk-aversion (Palacios-Huerta and Santos, 2004).

Recent advances in growth theory, based on microeconomic foundations, aim to highlight the various qualitative aspects of the growth process. Qualitative changes in economic development have been initially captured with threshold effects (e.g., Azariadis and Drazen, 1990). The scope of unified growth theory (Galor, 2005) is to explain economic development from a Malthusian regime to modern sustained economic growth in the framework of a single dynamic general equilibrium model. One of the key features of unified growth models relates to the evolution of latent variables (for instance, technological progress in Galor and Weill, 2000) combined with the existence of a subsistence constraint. This generates qualitative changes in economic dynamics replicating the stylized facts of the process of economic development.

Characterizing the relationship between individual behavior and economic development is particularly challenging. In his review of stylized facts on the demographic transition, Galor (2005) stresses that human capital had a limited role in the production process in the first phase of the industrial revolution and attributes the motivation for children's education to a variety of reasons not related to industrial development (e.g., religion, enlightenment). While individuals have always been engaged in child caring and rearing activities of an altruistic nature, it is usually argued that the increase in investment in human capital or, equivalently, in spending on child-oriented goods, had been induced by a gradual relaxation in households' budget constraints. Stylized facts on parent–child relationships gathered in this paper show that parental behavior is significantly affected by economic development and suggest that there is some formation of preferences at work in the course of the economic development process, with a reinforcement of altruistic traits stimulating child-oriented spending both in terms of time and goods.

Reinforcement of altruistic traits can be attributed to three main mechanisms: Darwinian selection, intergenerational taste externalities, and preference formation. In the context of a unified growth model with individuals differing with respect to the relative weights of children's quality and quantity, Galor and Moav (2002) examine the evolution of population types and show that individuals with a preference for children's quality have a Darwinian edge at the earlier stage of economic development. A growing literature focuses on how parents' behavior affects the preferences of their children owing to intergenerational taste externalities (Bisin and Verdier, 1998, de la Croix and Michel, 2001, Jellal and Wolff, 2002). Such reinforcement can also be traced back to the endogenous formation of altruistic preferences, as explored in this paper.

While intergenerational altruism is a well-established driver of savings and growth in macroeconomic models,2 it is only very recently that altruism has been considered as a trait parents can acquire. The endogenous preferences approach not only recognizes that parents care for the economic fate of their children, and make choices that affect their children's well-being, it goes one step further in that it extends the domain of parental choice to include the level of altruism a parent would want to have. This implies that parents invest resources (mainly time) to shape their own preferences towards more concern for their children when they recognize that such a change would raise their own utility. This is a cognitive process similar in nature to the choice of one's preferences for drugs when the effects of addiction are fully anticipated (Becker and Murphy, 1988). As Mulligan (1997, p. 76) puts it, “the point…is to allow adults to affect the kind of parents they will be. Do they want to be altruistic parents who place a lot of weight on their child's success or do they want to be less altruistic parents whose personal consumption is their main priority?”. In other words, it is because they rationally anticipate the effects of their actions on their future preferences and life-cycle utility that parents purposefully accumulate intergenerational altruism through the purchase of child-oriented goods (e.g., time spent interacting with their children).3 An important element in this rationale is that accumulating concern for one's children is costly (for if it was not, the economic approach could be applied to the consequences of given preferences but not to their formation). This means that the resources invested in acquiring altruism are distracted from other possible uses (for example, accumulating altruism comes at the price of having less time available for either leisure or work), and implies that a change in the relative price of child-oriented goods affects the degree at which altruism is accumulated as well as the consumption of the other goods entering in the parents' extended utility function (typically, the parents' consumption level and the size of the bequest passed on to the next generation).

Using this perspective, Mulligan (1997) suggested that new economic insight may be obtained by analyzing issues such as fertility, income distribution, fiscal policy, and economic growth, against a background of endogenous intergenerational altruism. Mulligan's analysis is based on a partial equilibrium framework; as such, this approach cannot fully capture the dynamic relationships between economic growth and the evolution of altruistic behavior. This paper extends Mulligan's model of endogenous altruism to a fully-fledged neoclassical framework by developing a general equilibrium model in which intergenerational altruism, interest rates and rates of economic growth are jointly determined. More precisely, we use a neoclassical growth model of successive generations in which each generation consumes, accumulates concern for children, and bequeaths. Unlike Barro's analysis of debt neutrality, which is based on the assumption that successive generations share a particular form of altruism, whereby all generations are linked together by a recursive altruistic relation (defining a dynastic utility function), other forms of altruism put forward in the literature – and often referred to as ad hoc forms of altruism – assume that parents' utility does not directly depend on their children's utility. Since such ad hoc forms of altruism allow for modeling the relationships between successive generations at a lower technical cost, most recent advances in the field of intergenerational altruism and economic growth have been achieved using models of ad hoc altruism rather than models of dynastic altruism à la Barro.4 Recent models of the demographic transition are based on ad hoc forms of altruism, with preferences being defined inter alia over quantity and quality of children. In this paper, a particular form of ad hoc altruism is assumed, where individuals choose the ratio between their own life-cycle consumption and the bequest to be passed on to their heirs. The production side is given by a standard Cobb–Douglas technology, while demand is obtained, in line with Mulligan (1997), by maximizing the utility of a representative consumer with Leontieff preferences over consumption and bequests.

The main result of this paper is to put forward a new mechanism possibly explaining qualitative changes in the course of the economic development process. This relates to changes in parental behavior, in particular in terms of time and resources devoted to child rearing activities, which we attribute to the endogenous reinforcement of altruistic traits beyond an endogenously given degree of economic development. At earlier stages of economic growth, individuals are constrained with respect to spending on child-oriented goods; both their consumption patterns and intergenerational transfers only depend on their natural degree of altruism. Along the growth path, the endogenous formation of altruism starts once economic development exceeds a threshold level, at which individuals have satisfied their own physiological constraints in terms of personal consumption and can devote resources to the shaping of their own altruistic preferences. This in turn increases their social degree of altruism beyond its natural level, which leads to larger bequests and thus speeds up the pace of capital accumulation and economic development.

The remainder of this paper is organized as follows. In Section 2, we briefly review some stylized facts that the theory contributes to explain alongside more traditional explanations. In Section 3 we set up a neoclassical growth model of endogenous altruism, establish a sufficient condition under which the dynamics are globally concave, and examine the relationships between economic development and the endogenous formation of altruistic preferences. Section 4 concludes.

Section snippets

Background

The main result outlined above is consistent with historical and contemporaneous evidence on the relationships between altruism, demand for child-oriented goods, and stages of economic growth. Obviously, preferences are not observable, but bequests and consumption of child-oriented goods are. In any event, we do not pretend that levels of parental altruism are higher or lower in particular places, but simply that there is a positive relationship between the accumulation of parental altruism and

Individual preferences

A parent's concern for a child's welfare is assumed to depend on the amount of resources, qt, directed toward the accumulation of altruism. This notably includes the opportunity value of the time parents spend to educate their children and any expenditure on child-oriented goods or activities. We denote with f(qt) the level of parent-to-child altruism, which is endogenously determined as a function of child-oriented spending. We assume that for all q  0, this function is positive-valued, f(q) > 0,

Conclusion

Modern neoclassical economics emphasize that behavioral changes generally result from changes in the economic environment; and indeed, economic growth strongly impacts on people's observed behavior by alleviating borrowing constraints and easing access to education or healthcare. However, this may be only part of the picture, as economic growth also brings about changes in individuals' attitudes and values. In the case of intergenerational altruism, this is illustrated, for example, by the fact

Acknowledgement

We are grateful to Bertrand Crettez, Guillaume Daudin, Anjini Kochar, David McKenzie, Casey Mulligan, Philippe Michel, Emmanuel Thibault, and two anonymous referees of this journal, for helpful comments and suggestions. The usual disclaimer applies. A previous version of this paper appeared as SCID Working Paper No 166, Stanford University, May 2003.

References (38)

  • Gary S. Becker

    A theory of social interactions

    Journal of Political Economy

    (1974)
  • Gary S. Becker

    Accounting for Tastes

    (1996)
  • Gary S. Becker et al.

    A theory of rational addiction

    Journal of Political Economy

    (1988)
  • Gary S. Becker et al.

    The endogenous determination of time preference

    Quarterly Journal of Economics

    (1997)
  • Suzanne M. Bianchi

    Maternal employment and time with children: dramatic change or surprising continuity?

    Demography

    (2000)
  • S Bowles

    Endogenous preferences: the cultural consequences of markets and other economic institutions

    Journal of Economic Literature

    (1998)
  • Brezis, Elise S., 2002. Fertility, non-altruism and economic growth: industrialization in the nineteenth century,...
  • Brown, Lynn R., Lawrence Haddad, 1995. Time allocation patterns and time burdens: a gendered analysis of seven...
  • Keith W. Bryant et al.

    Are we investing less in the next generation? Historical trends in time spent with children

    Journal of Family and Economic Issues

    (1996)
  • Cited by (20)

    • Altruistic preference and government subsidies in a manufacturing-recycling system with eco-design

      2022, Journal of Cleaner Production
      Citation Excerpt :

      South Korean chemical manufacturer SK Global Chemical Co. invested $56.5 million in the recycling startup Loop Industries Inc. to support its technology development of recycling (Loop Industries, 2021). The behavior exhibited by each of these manufacturers is called altruistic preference (AP), which means that a firm takes into account not only its own profit but also the profits of its partners when making decisions (Rapoport and Vidal, 2007). Driven by AP, manufacturers are concerned about the operational issues faced by recyclers and take actions to help them.

    • Recycling decisions of low-carbon e-commerce closed-loop supply chain under government subsidy mechanism and altruistic preference

      2020, Journal of Cleaner Production
      Citation Excerpt :

      There is a deviation between the complete "rational man" hypothesis and the real world, being that people are bounded rational (Sober and Wilson, 1998). It is found that one of the factors for bounded rationality is altruistic behavior (Rapoport and Vidal, 2007). Loch and Wu (2008) first focused on altruistic preferences in a supply chain and used controlled experimentation to investigate the impact of altruistic preferences on pricing, profitability, and performance.

    • The endogenous formation of an environmental culture

      2015, European Economic Review
      Citation Excerpt :

      The first extension to the literature that we develop here is that environmental culture is endogenously determined. The modeling approach shares ideas from Rapoport and Vidal (2007) and John and Pecchenino (1994). In our approach, environmental culture affects how society values consumption relative to environmental quality when old, and it develops costlessly via an intergenerational transmission channel,1 or society may invest into environmental culture via an education channel.2

    • Expropriation risk and discounting

      2013, Research in Economics
      Citation Excerpt :

      Mulligan's (1997) analysis centers on endogenous altruism, whereby parents spend time and goods in order to influence their concern for children. Rapoport and Vidal (2007) extends Mulligan's partial equilibrium framework of endogenous altruism to a general equilibrium model in which intergenerational altruism, interest rates and rates of economic growth are jointly determined.1 Finally, Palacio-Huerta and Santos (2004) develop a general equilibrium model of competitive sorting with incomplete markets in which individuals' attitudes toward risk are formed as a function of the exposure to market incompleteness.

    • Dynamic efficiency and intergenerational altruism

      2008, Review of Economic Dynamics
    View all citing articles on Scopus

    The views expressed in this paper are those of the authors and do not necessarily reflect those of the European Central Bank (ECB).

    View full text