Transfers, Empathy Formation, and Reverse Transfers

Abstract

The literature on private transfers tends to differentiate between two main transfer motives: exchange and altruism (for a recent review see Laitner, 1997; for an empirical analysis see Cox and Rank, 1992). An exchange-driven transfer is positively correlated with the income of the recipient; a recipient is better equipped to provide a service (for example, insurance or support) to a donor when the recipient’s income is higher. A higher anticipated return then prompts a higher transfer. This reasoning implicitly assumes the recipient’s willingness to provide a service. An altruism-driven transfer is negatively correlated with the income of the recipient. The donor cares about the recipient’s well-being. A decline in this well-being prompts an infusion of support aimed at raising the recipient’s income and consumption. This reasoning explicitly assumes that the donor’s attitude towards the recipient is parameterized by an altruism coefficient attached to the recipient’s utility in the donor’s utility function, and implicitly assumes that the recipient’s attitude towards the donor is given; indeed, that in the donor’s mind or heart it plays no role whatsoever.

Steinar Holden, David M. Kreps, Andreu Mas-Colell and Atle Seierstad transferred to us very helpful comments and reflections. They earned our empathy. Partial financial support from the National Institute on Aging grant (RO1 — AG13037) is gratefully acknowledged.