A Dynamic Model of Exchange Bequest and Eldercare

ABSTRACT

This paper develops an overlapping generations model with intrafamily bargaining to analyze the provision of informal eldercare by non‐altruistic children. Parents strategically deploy wealth transfers—comprising their personal savings and inheritances received from their own parents—to incentivize informal care, with formal care serving as their credible outside option. Informal care plays a key role in preserving household financial resources that could otherwise be exhausted by the cost of formal care. We show that inherited wealth progressively dampens the incentive for new savings, propelling the economy toward a zero‐savings steady state, whereas parental transfers and the resulting eldercare provision rise in tandem toward their steady‐state levels. The decentralized equilibrium is inefficient during the transition path: individuals may underprovide eldercare under certain parameter configurations and save excessively. A government subsidy for formal care, which enhances the elderly's bargaining position, can correct the inefficiency associated with informal care and improve social welfare in the steady state.