Incentive Effects of Parents' Transfers to Children: An Artefactual Field Experiment

The standard altruism model within the family predicts that transfers will be inversely related to the recipient's income. Thus, parents will implicitly insure children against bad luck. This insurance may cause children to take undesirable risks. Anticipating this moral hazard, parents may alter their transfers. Using an artefactual field experiment, we show that parents use transfers to compensate for differences between their teenage children when incomes are independent of children's actions. However, when a potential incentive problem is introduced, parents generally move away from compensating transfers. In addition, we find that the teenage children are more likely to take unfair bets when their behavior is not detectable by their parents.