Intergenerational Transfers, Income Shocks And Human Capital: Evidence From A Natural Experiment

Enrica Croda, University of California at Los Angeles

This paper uses the GSOEP to investigate the impact of German reunification on transfers from parents to their children. A difference-in-differences approach is applied to estimate changes in the probability and amount of transfers in East and West Germany. The analysis indicates that overall, in both regions, transfers are negatively correlated with the relative income of children relatively to their parents. However, in both regions, transfers towards college-age children have increased. These results cannot be reconciled with the standard altruism model. I propose a model with altruistic parents and liquidity constrained children making human capital investment that explains the findings.