Intergenerational transfers and household structure: why do most Italian youths live with their parents?

85 percent of Italian men aged 18-33 live with their parents. We argue that Italian parents like to live with their children and a rise in their income makes it possible for them to offer their children higher consumption in exchange for their presence at home. Children prefer to live on their own but are willing to exchange some independence for extra consumption. We formalize this intuition with a bargaining model between parents and children. We test the predictions of the model by estimating the effect of parental income on the probability that children live with their parents. The key econometric issue is the endogeneity of parental income. In order to identify the causal effect of parental income on children''s living arrangements we use changes in parents'' retirement age induced by the 1992 reform of the Italian social security as an instrument for parental income. By raising retirement age, this reform forced some fathers to remain in the labor market longer than the cohort immediately preceding them, therefore raising their income. Our instrumental variable estimates indicate that a rise in parents'' income significantly raises the children''s propensity to live at home: a $500 increase in annual parental income results in a 3 to 3.5 percentage point rise in the proportion of children living with their parents.