How Responsive are Private Transfers to Income? Evidence from a Laissez-Faire Economy

Abstract

In recent years there has been rapidly growing interest in the implications of altruistic preferences for economic behavior. Undoubtedly most of this interest is fueled by altruism's often pivotal role in economic models and policy issues. Yet there is also an emerging consensus that empirical evidence for altruistic preferences--as specified in the seminal models of Becker and Barro- -is lacking, at least for the United States. The failure to find strong evidence for altruism flies in the face of what seems to be an eminently commonsensical proposition about behavior. A possible reason for the lack of evidence for altruism in a developed country like the United States is that its substantial public transfers may have already crowded out private ones to a large extent, rendering the remaining small samples uninformative about altruism. In this paper we focus on a country with extremely limited public income redistribution, the Philippines. We examine a model that nests the Becker-Barro model of altruism and predicts that the relationship between private transfers and pre-private-transfer income will be non-linear, 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 a rigorous econometric test of the altruism hypothesis. We find that private transfers are widespread, highly responsive to household economic status and conform to patterns implied by altruistic utility interdependence. In particular, among the poorest households, we estimate that decreases in pre-private- transfer income would prompt large increases in private transfers. Our findings have significant policy implications, because they imply that attempts to improve the status of the poor 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 altruistic preferences create for public income redistribution, first pointed out by Becker and Barro over 20 years ago, do indeed matter empirically.