Risk-Sharing within Families: Evidence from the Health and Retirement Study

We report strong empirical support for the presence of self-interest-based risk sharing within extended families in the U.S. A standard model of self-interest-based risk sharing predicts that the share of current family income consumed by a child positively depends on that child's permanent income. It follows that parental transfers to children that are expected to earn more over the period of risk-sharing arrangements should exhibit less sensitivity to the recipient's income fluctuations. We test this distinguishing prediction of self-interest-based risk sharing by exploiting the variation of transfer receipts among siblings, observed over 17 years of longitudinal data spanned by the Health and Retirement Study.