Parental Altruism, the Samaritan's Dilemma, and the College Decision

Abstract

I study how parental altruism shapes investment in college. Altruistic parents support children when resources are low, financing college and insuring income risk but—because they cannot commit to withholding support—creating a Samaritan’s dilemma. College disciplines it where cash cannot, by permanently raising the child’s income. In matched parent–child data, parents of college children consume about 8% more (roughly $2,500 a year) yet transfer about a fifth less often—the signature of releasing the precautionary resources held to stand ready to help. I quantify the mechanism in a continuous-time dynastic model estimated by simulated method of moments. The inability to commit distorts the college decision unevenly: it raises attendance for low-ability children (by 13–18 percentage points), for whom anticipated support makes college affordable, but lowers it for the medium- and high-ability (by up to 27 points), who can lean on the parent’s lifetime safety net instead of investing to become self-sufficient—a small net decline. The same transfers that distort the college margin also insure children, so severing the relationship to remove the dilemma—through a one-time transfer—lowers welfare for both parent and child, about 12% for the dynasty; only full commitment, which removes the dilemma while preserving insurance, raises dynastic welfare (+15%), and it does so by reallocating from child to parent rather than as a Pareto improvement. Free college operates through the same relationship: it reallocates resources to the child (about +5%) rather than financing many new entrants, leaving the dynasty roughly neutral.

Agustin Diaz Casanueva

Economist

I study how households make economic decisions about consumption, fertility, and labor supply in response to shocks and policy changes.