This paper exploits a natural policy experiment to directly identify the crowding out effects of public transfers on the incidence and level of private transfers. The introduction of a large social security program in Taiwan is used to estimate the effect of an exogenous increase in government transfer payments to the elderly on the private transfer behavior of their adult children. Using an instrumental variables strategy that accounts for the endogeneity of receiving public transfers, the empirical results show strong evidence of crowding out on the extensive margin (the probability of providing a positive transfer) and weaker evidence of crowding out on the intensive margin (the amount of the transfer conditional on it being positive).
JEL classification: H53, H55, H31
Key words: private transfers, crowding out
The authors thank Kevin Lang, Chris Cunningham, and Chris Foote for helpful comments and discussions. The views expressed here are the authors' and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.
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