Altruism with Endogenous Labor Supply

This paper proposes a model of altruism with endogenous labor supply. A full characterization of the family's choices of consumption and leisure is provided. Initially, work effort is assumed to be publicly observed; this assumption is later relaxed, allowing for privately observed effort. It has been stated, in the altruism literature, that the distribution of resources within the family should not affect the allocation of consumption across its members. In other words, for families engaging in financial transfers, taking one dollar from the transfer recipient's income and adding it to the donor's should result in an increment of the initial transfer of exactly one dollar, leaving the consumption allocation unchanged. The endogenous consideration of labor supply introduces important qualifications to this "neutrality result," showing that neutrality holds only with respect to non-labor income sources. Further, when effort is privately observed, the need to convey incentives causes neutrality to break down entirely. Confronting the predictions of the model with empirical results from the literature, it is argued that, to the extent that data portray families having the ability to adjust their labor supply to changes in wages and income, there is no clear evidence of rejection of altruism. Moreover, when effort is privately observed, the predictions of the theory accord with the empirical results.