Upstream intergenerational transfers in economic development: The role of family ties and their cultural transmission

Abstract

I construct a model where upstream income transfers, from adult children to their old parents, are driven by a culture of strong family ties. This evolves endogenously, through a process of intergenerational cultural transmission. The two-way causal link between economic and cultural change can be a strong enough force to offset cultural substitution, thus generating path-dependent outcomes. These outcomes show that economic development is negatively related with upstream intergenerational transfers, and with the strength of family ties. On the one hand, the economy may follow a convergence path towards a low level of economic development, where adherence to strong family ties is the dominant characteristic of a culturally homogeneous population, and where the overall flow of intergenerational transfers is substantial. On the other hand, the economy may follow a different path of convergence towards a relatively higher level of economic development, where the population is more diverse in terms of their attitudes on family ties, and where the overall flow of intergenerational transfers is lower by comparison.

Introduction

The subject of private intergenerational transfers has gained momentum in the analysis of economic growth and development. However, the vast majority of existing studies have restricted attention to downstream wealth transfers within the family, i.e., from parents to their progeny, with the purpose of establishing a link between the dynamics of lineage wealth, inequality, and economic development (e.g., Banerjee and Newman, 1993, Galor and Zeira, 1993, Zilcha, 2003, Galor and Moav, 2004). By comparison, the number of studies considering upstream transfers, from adult children to their old parents, is rather limited. This neglect is not warranted.

Several authors have argued that the financial support that adults provide their old parents is a salient feature of developing economies (e.g., Caldwell, 1976; Clay and Vander Haar, 1993, Sloan et al., 2002, Payne et al., 2019), while others have shown that the anticipation of such transfers can alter the recipients’ decision making on aspects that are pertinent to economic growth and development (e.g., Laitner, 1988, O’Connell and Zeldes, 1993, Blackburn and Cipriani, 2005).

The objective of this study is to contribute towards filling this void in the literature. It presents a growth model where the provision of income from adult children to their old parents, is driven by attitudes, norms and customs on the strength of family ties.¹ These are treated as cultural traits that evolve intergenerationally, through a process of cultural transmission. The model shows that economic development is negatively related with upstream intergenerational transfers, and with the strength of family ties. The key factors of the model’s mechanisms are the impact of income transfers on parents’ saving behaviour, the declining significance of these transfers for parents’ overall income in the process of economic development, and the influence of these characteristics on the intensity of cultural instruction by parents with different attitudes on family ties. Furthermore, the study’s results offer more general implications about the role of economic factors for the evolution and establishment of cultural traits among the population.

The aspect of cultural transmission is a significant point of departure of my framework, in comparison to existing theories of economic growth that incorporate intergenerational income transfers among family members. This approach is justified though, given the focus on upstream intergenerational transfers and their underlying characteristics. Indeed, there is a plethora of arguments, offering credence to the view that a strong sense of family ties is a fillip to moral considerations of filial piety, which provide individuals with an incentive to offer financial support to their parents. Chang (2013) presents empirical evidence on a positive relation between family ties and intergenerational transfers from adult children to their old parents, whereas Costa-Font (2010) presents evidence that strong family ties generate expectations to individuals, regarding the potential support from their progeny, prompting them not to insure against the costs of their future long-term care.² The study by Jellal and Wolff (2002) offers empirical support to the idea that the altruistic motives behind upstream intergenerational transfers are culturally transmitted from the older to the younger generations.

To some extent, these observations echo Becker’s (1992) argument that “parents[$\dots$] may try to instil in their children feelings of guilt, obligation, duty, and filial love that indirectly, but still very effectively, can “commit” children to helping them out.”³ These ideas become even more pertinent, once we consider evidence that the culture of strong family ties is more prevalent in developing countries (e.g., Alesina and Giuliano, 2010, Alesina and Giuliano, 2014) i.e., those countries in which we observe significant transfers from adult children to their old parents.

My model is consistent with the previously discussed ideas. There are two cultural traits determining agents’ attitudes on family ties, and only those who are inculcated with a strong sense of family ties provide income transfers to their old parents. These transfers are given as ‘gifts’, i.e., they are not quid pro quo. Following the pioneering work of Bisin and Verdier (2001), I assume that the main underlying motive why parents actively undertake the cultural instruction of their children is because they use their own subjective viewpoint as the benchmark for evaluating their children’s personalities — ultimately, they want their children to uphold the same attitudes and values as they do.⁴ Nevertheless, the link between the strength of family ties and the potential receipt of financial support from adult children, triggers additional parental considerations of a more opportunistic nature: Given the prospect of receiving income from their children, parents who uphold a strong sense of family ties have an additional motive – and, therefore, intensify their efforts – to inculcate their offspring with the same attitudes, whereas parents whose sense of family ties is weak have a reduced incentive – and, therefore, abate their efforts – to instil their own attitudes in their offspring. As the economy grows, however, the importance of intergenerational income transfers for parents’ overall income declines. Consequently, economic development is associated with less intense instruction towards a culture of strong family ties and, therefore, a gradual reduction in the population share of individuals who uphold such attitudes and values. These outcomes cause an overall reduction of upstream intergenerational transfers in the process of economic development.

The impact of economic development on the population’s adherence to strong family ties is not the only mechanism that links economic dynamics and cultural change. On the contrary, the causal effect runs in the opposite direction as well: A shift in the distribution of traits among the population, favouring a limited adherence to strong family ties, and the corresponding decline in the overall flow of income transfers from adult children to their old parents, are factors that promote capital accumulation and economic growth. The reason is that parents who anticipate the receipt of income from their children, hence increased consumption in maturity, reduce their saving when young in an effort to smooth their intertemporal consumption profile. This mechanism is intuitive and consistent with the existing results on the relation between upstream income transfers and saving behaviour — see, for example, Laitner (1988) and O’Connell and Zeldes (1993). It is also consistent with the results presented in Costa-Font (2010).

These arguments reveal that a cultural-economic complementarity underlies the mechanisms of the model: Limited adherence to strong family ties reduces upstream transfers, thus promoting saving and capital accumulation, while the processes of capital accumulation and economic growth bring forth an endogenous cultural change towards limited adherence to strong family ties, hence to an overall reduction of upstream transfers. This two-way causal link between economic development and the cultural evolution of attitudes on family ties, can generate path-dependent equilibria, i.e., outcomes that are not only sensitive to structural parameters, but also to the economy’s history. On the one hand, the economy may follow a convergence path towards a low level of economic development, where adherence to strong family ties is the dominant characteristic of a culturally homogeneous population, and where the overall flow of transfers from adult children to their old parents is substantial. On the other hand, the economy may follow a different path of convergence towards a higher level economic development, where the population is more diverse in terms of their attitudes on family ties, and where the overall flow of transfers from adult children to their old parents is lower by comparison. Thus, the different long-term equilibria are consistent with the negative correlation between (i) economic development and upstream income transfers within families, and (ii) economic development and the strength of family ties.

An alternative way to understand the relevance of family ties and upstream intergenerational transfers for comparative economic development is through a historical comparison of European and East Asian regions. Several researchers (e.g., Todd, 1990, Duranton et al., 2009, Greif and Tabellini, 2010) argue that the family culture that historically prevailed in Northwestern Europe is a nuclear/libertarian one, where children develop a greater sense of independence and leave their parental home early in their adulthood. In contrast, the stem/communitarian family, which dominated East Asian culture, entailed stronger norms of parental authority and filial obligation. Zhang (2019) provides evidence that the communitarian family culture is positively related with financial transfers from adult children to their parents, therefore indicating that differences in family culture could explain why upstream transfers are more significant in some East Asian countries – according to Lin and Yi (2013), the dominant form of intergenerational support in these regions – compared to the more developed European countries, in which upstream transfers are less prevalent (Attias-Donfut et al., 2005).⁵

There are additional, indirect mechanisms that link the process of development, the strength of family ties, and the level of upstream intergenerational transfers. For example, economic conditions and the prevailing family culture in Northwestern Europe facilitated earlier urbanisation (in comparison to East Asian regions) which, in turn, weakened family ties (Greif, 2006). At the same time, however, this enabled the earlier and more widespread establishment of – as well as the increased trust to – institutions such as social security (Korpi, 2000, Caucutt et al., 2013), which, according to empirical studies, could be a substitute for private upstream transfers within the family (Sloan et al., 2002, Zhang, 2019).⁶

Duranton et al. (2009) explicitly argue that differences in family culture could explain persistent differences in economic conditions, claiming that “family structures [$\dots$] have continued to influence our society today in a path-dependent manner” (Duranton et al., 2009; p. 32). It is worth mentioning, however, that the emergence of path-dependent outcomes in my model has more general implications for the dynamics of cultural transmission – implications that go beyond the specific example of the nexus between economic development, family ties, and upstream intergenerational transfers.⁷ To see this, note that in archetypal economic models of cultural transmission, like the one pioneered by Bisin and Verdier (2001), the population share of individuals who possess a specific cultural trait (i.e., in terms of preferences, attitudes, values, norms etc.) is a substitute to parents’ own efforts to instruct their children towards the adoption of this trait. Under such circumstances, which Bisin and Verdier (2001) summarised through the term ‘cultural substitution’, the dynamics of cultural transmission do not display path-dependence. Instead, the long-run outcome is a unique equilibrium of cultural diversity: This equilibrium depends on the model’s structural parameters, but it is not sensitive to history (Bisin and Verdier, 2001, Bisin and Verdier, 2008). In my model, path-dependence and a long-run outcome of cultural homogeneity are possible, despite the presence of cultural substitution. There are two key features responsible for this outcome: First, the distribution of cultural traits is not the only state variable in the model. On the contrary, there is another, economic-related state variable (in this case, the stock of capital). Second, the evolution of these two state variables is subject to the complementarity that I described previously: Capital formation and economic development induce a cultural change towards reduced adherence to strong family ties, while the lower population share of those who conform to a culture of strong family ties promotes the formation of capital and, therefore, the process of economic development. If this underlying cultural-economic complementarity is strong enough, it can dominate the opposing forces of cultural substitution, thus triggering and sustaining the sequence of reinforcing effects between cultural and economic dynamics, and ultimately laying the foundations for path-dependence.⁸

In this respect, my study evokes one of the underlying messages in Francois and Zabojnik (2010): Their model also raised awareness to the possibility that the complementary nature between economic development and cultural change can result in path-dependent outcomes.⁹ However, the model of Francois and Zabojnik (2010) rules out cultural substitution, as it does not account for the cost borne by parents in their effort to instil their own trait in their offspring. My model shows that the complementarity between economic development and cultural change is strong enough to offset the presence of cultural substitution in generating divergence through history-dependent outcomes.

Another strand of literature that merits mentioning, given the characteristics of my study, is the one that investigates two-sided altruism in overlapping generations economies. The focus of this literature is different from my study: It is not explicit on the cultural aspects that underlie the extent of altruistic motives and the level of intergenerational transfers. Furthermore, this literature investigates and emphasises the equilibrium and welfare implications of intergenerational transfers (including upstream ones) rather than their changing patterns in the process of economic development. For example, Kimball (1987) studies the implications for dynamic inefficiency, while Raut (2006) examines issues of optimality, given the consumption externalities that two-sided altruism entails. One exception is the study of Blackburn and Cipriani (2005) who also identify the reduced significance of upstream transfers in more developed economies. Nevertheless, their focus is on aspects of demographic change — they do not consider endogenous cultural change, saving and capital formation.

The remainder of this study is structured as follows: Section 2 describes the characteristics of the economy. In Section 3 I present the detailed analysis of cultural transmission, while in Section 4, I analyse the process of capital formation. Section 5 analyses the model’s joint dynamics, and presents the main implications for economic development, the evolution of family ties, and upstream intergenerational transfers. Section 6 discusses and concludes the paper.