Post mortem reputation, compensatory gifts and equal bequests

Abstract

The empirical evidence suggests that parents use inter vivos gifts (i.e., transfers of tangible and financial property) to compensate less well off children whereas post mortem bequests are divided equally among siblings. We study a theoretical model assuming, first, that the amounts given is private information, only known to the donor and the donee, while the amounts bequeathed is public information. Second, we assume that parents care about the reputation that their bequest behavior will leave them after their death. More specifically, this reputation is deteriorating in the difference in amounts inherited. We show that, given these assumptions, the optimal choice of altruistic parents is compensatory gifts and equal bequests.JEL: D10, D31, D63, D64.

How Inheriting Affects Bequest Plans

“…Page (2003) finds evidence supporting the claim that higher inheritance tax rates significantly increase the giving of gifts in the USA. Other studies (Kolm 2006;Lundholm and Ohlsson 2000;Menchik and Jianakoplos 1998) attribute bequeathing to a variety of other factors. These and related studies are not structured to predict the size of planned bequests, the "replication effect" model of Cox and Stark (2005b) being an exception.…”

Are Americans and Indians More Altruistic than the Japanese and Chinese? Evidence from a New International Survey of Bequest Plans

“…In a similar vein, Laitner (1997) and Lundholm and Ohlsson (2000) attribute equal division to parents' desire to insure post-mortem reputation, to preserve family solidarity, and to avoid conflicts among their children.…”

The Division of Parental Transfers in Europe

“…These authors exploit a Norwegian dataset of inter-vivos transfers to find econometric results suggesting such parental dilemma. Lundholm and Ohlsson (2000) also assume the private/public information dimension of the transfers but they consider that parents care about a post mortem reputation. This reputation is damaged if parents depart from a social norm that stipulates equal sharing among siblings.…”

“…This reputation is damaged if parents depart from a social norm that stipulates equal sharing among siblings. The existence of this equal division norm is only assumed in Lundholm and Ohlsson (2000) but the model of Bernheim and Severinov (2003) explains its existence and strength. This model leads to equilibria where equal division of bequests and unequal distribution of financial gifts are feasible.…”