Motives for Transfers from Parents to Children: Tests with First-Time Homeowners' Data

TY - UNPB

T1 - Motives for Transfers from Parents to Children

T2 - Tests with First-Time Homeowners' Data

AU - Kolodziejczyk, Christophe

AU - Leth-Petersen, Søren

N1 - JEL classification: D91, E21, R29

PY - 2010

Y1 - 2010

N2 - There are good theoretical reasons why transfers from parents are likely to be important around the time of the first home purchase. Transactions costs associated with trading houses make people with increasing income paths prefer to buy a house that is more expensive than what matches their current income. This together with a down-payment constraint make some first-time house owners borrow to the limit and run down liquid assets at purchase thereby making them vulnerable to adverse income shocks. Intergenerational transfers can alleviate these constraints. Moreover, previous papers have suggested that transfers from parents to children are significant exactly around the time where children buy their first home. Using a panel data set issued from Danish administrative registers with information about wealth of a sample of first-time homeowners and their parents, we document that child and parent resources, house value as well as financial resources are correlated. We then go on to test if there are direct parental transfers targeted to the purchase of the house, and in case of an unemployment spell during the years after the purchase where children typically hold little liquid assets. We also test whether children consider parental wealth as part of their own precautionary savings. We do not find strong evidence of any of these hypotheses.

AB - There are good theoretical reasons why transfers from parents are likely to be important around the time of the first home purchase. Transactions costs associated with trading houses make people with increasing income paths prefer to buy a house that is more expensive than what matches their current income. This together with a down-payment constraint make some first-time house owners borrow to the limit and run down liquid assets at purchase thereby making them vulnerable to adverse income shocks. Intergenerational transfers can alleviate these constraints. Moreover, previous papers have suggested that transfers from parents to children are significant exactly around the time where children buy their first home. Using a panel data set issued from Danish administrative registers with information about wealth of a sample of first-time homeowners and their parents, we document that child and parent resources, house value as well as financial resources are correlated. We then go on to test if there are direct parental transfers targeted to the purchase of the house, and in case of an unemployment spell during the years after the purchase where children typically hold little liquid assets. We also test whether children consider parental wealth as part of their own precautionary savings. We do not find strong evidence of any of these hypotheses.

KW - Faculty of Social Sciences

KW - Intergenerational transfers

KW - home purchase

KW - saving

KW - empirical analysis

M3 - Working paper

BT - Motives for Transfers from Parents to Children

PB - Department of Economics, University of Copenhagen

ER -