Do Bequests Increase Labor Market Risk?

Previous work on the effects of intergenerational transfers has implied that such transfers benefit recipients by insuring against labor market risks. Allowing for equilibrium labor market responses, however, one would expect the aggregate level of transfers to affect the distribution of wages across states of nature. In a simple two-state model of intergenerational transfers with a labor market, we find that private transfers increase the volatility of wages. As a result, the equilibrium level of transfers exceeds the socially-optimum level of transfers