Gifts, bequests and family incentives

In this note, we use the theory of incentive contracting to characterize the pattern of financial transfers within the family. Using an altruistic model based on bounded rationality with one parent and two children, we show that the parent may provide a lower gift to the less well-off child, while bequests are always compensatory. (c) 2006 Elsevier B.V. All rights reserved.