Scandinavian Working Papers in Economics

SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

No 681: Family ties, incentives and development: a model of coerced altruism

Ingela Alger () and Jörgen Weibull ()
Additional contact information
Ingela Alger: Carleton University, Postal: Carleton University, 1125 Colonel By Drive, Ottawa, Ontario, K1S 5B6, Canada
Jörgen Weibull: Dept. of Economics, Stockholm School of Economics, Postal: Stockholm School of Economics, P.O. Box 6501, SE-113 83 Stockholm, Sweden

Abstract: We analyze the effects of family ties on the incentives for production of effort, where family ties are defined as a mixture of true and coerced altruism between family members. We model families as pairs of siblings. Each sibling exerts effort in order to obtain output under uncertainty. A social norm dictates that a sibling with a high output must share a specified amount of this output with his sibling, if the latter's output is low. Siblings may be truly altruistic towards each other, but not to a larger degree than dictated by the social norm. We compare such informal family insurance with actuarially fair formal insurance. We show that coerced family altruism reduces individual efforts in equilibrium. However, individuals always benefit ex ante from living in families with coerced altruism, as compared with living in autarky. We show that a certain degree of coerced family altruism is robust as a social norm in a society of selfish individuals. Finally, we show that if family members are sufficiently altruistic to each other, then informal family insurance by way of coerced altruism may outperform actuarially fair insurance programs.

Keywords: altruism; coerced altruism; family ties; insurance; moral hazard

JEL-codes: D02; D13

32 pages, October 24, 2007

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