Donald Cox, Bruce E. Hansen, and Emmanuel Jimenez
"How responsive are private transfers to income? Evidence from a laissez-faire economy"
Journal of Public Economics, (2004), 88, 2193-2219.
In recent years there has been rapidly growing interest in the responsiveness of private transfers to household income, or “transfer derivatives.” Undoubtedly most of the interest in transfer derivatives is fueled by the problem of “crowding out”: If incomes are fungible, and private transfers are highly responsive to household resources, expansion of public transfers could serve merely to supplant private ones, leaving the distribution of household consumption largely unchanged. Yet there is also an emerging consensus from empirical work that these transfer derivatives are rather small, at least for the United States, implying that crowding out might loom larger in the minds of some economists than in the data.
A possible reason for the lack of evidence for crowding out in a developed country like the United States is that the substantial public transfers that already exist could have rendered it a fait accompli, leaving the remaining small samples uninformative about crowding out. In this paper, we focus on the Philippines, a country with extremely limited public income redistribution. We also pay attention to the possibility that theoretical models of private transfers, including models of altruism and household risk-sharing, can imply a non-linear relationship between inflows of private transfers and household resources, taking the form of a spline.
We estimate this model by non-linear least squares, treating the threshold (knot point) as an unknown parameter, using recently developed econometric techniques. This allows for a more exact measurement of transfer derivatives than the more commonly applied monotonic approach. We find that private transfers are widespread, and that they can be highly responsive to household economic status, in a way that is consistent with either altruistic preferences, effective household risk-sharing, or both. A strong transfer derivative occurs, however, only for the very poorest households, where decreases in their resources prompt very large increases in private transfers.
Our findings have significant policy implications, because they imply that attempts to improve the status of the very poorest households could be thwarted by private responses. Some of the gains from public transfers would be shared with richer households whose burden of support for their less fortunate kin is eased. So the problems that operative private transfers create for public income redistribution, first pointed out by Becker and Barro 25 years ago, do indeed matter empirically.
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Some of the above material is based upon work supported by the National Science Foundation under Grants No. SES-9022176, SES-9120576, SBR-9412339, and SBR-9807111.
Any opinions, findings, and conclusions, or recommendations expressed in this material are those of the author(s), and do not necessarily reflect the views of the NSF.