The role of inter vivos giving in general equilibrium

This paper studies a welfare aspect of inter vivos giving in a dynamic general equilibrium lifecycle model. The research is motivated by observations from micro data that an individual who receives giving from a living parent holds more wealth for his lifetime than a non-recipient. The pattern continues even after he stops receiving while only bearing the opportunity cost of giving during very old age. This suggests that we need to model inter vivos giving to understand the potential benefit from it. The calibrated model shows that inter vivos giving improves the welfare for both a recipient and a donor in the long run by smoothing lifetime consumption with increased private saving. The model also explains why we do not observe large amounts of inter vivos giving in the data, in spite of its Pareto-improving aspect, by showing that the welfare improvement from inter vivos giving substantially diminishes when we introduce the gift tax in an economy.