When you need it or when I die? Timing of monetary transfers from parents to children

The standard overlapping generations model assumes the ability to borrow against bequests. If this assumption is not met, it may happen that not all generations smooth their consumption over time. We prove that by allowing for inter vivos transfers in this latter situation, all generations smooth consumption, i.e. the first best solution is restored. Next, using a combination of Dutch survey and administrative data, we provide empirical support for the model’s implication that parents transfer wealth when their children are in need of borrowing out of future resources. Our findings suggest an instrumental role for inter vivos transfers as a device that generations can resort to in order to smooth consumption.