1

Are the Japanese Selfish, Altruistic, or

Dynastic?

Invited Lecture2004 Far Eastern Meeting of the

Econometric Society

Charles Yuji Horioka

Institute of Social and Economic Rese

arch, Osaka University

July 2, 2004

2

Assumptions Made by Economists

(1) Firms maximize profits• Separation of ownership and co

ntrol (Berle/Means, 1932)• Labor managed firms (2) Households (individuals) maxi

mize their own utility• Bounded rationality• Altruism model• Dynasty model

3

The Objective of Today’s Talk

To determine which model of household behavior applies

in Japan and the United States by examining four

types of evidence:

1. History of bequest practices

2. Data on bequest motives and bequest division

3. Data on willingness to help others

4. Empirical analyses

4

A. Theoretical Models of Household Behavior

• The life cycle model

• The altruism model

• The dynasty model

5

(1) The Life Cycle Model

• Hypothesis: Individuals are selfish.• Bequest motive: Individuals don’t

leave bequests, leave only unintended bequests arising from lifespan uncertainty, or leave only bequests that are a quid pro quo for care, attention, and/or financial assistance during old age.

• Bequest division: Individuals leave everything to the child/children who provide care, attention, and/or financial assistance during old age.

6

(2) The Altruism Model

• Hypothesis: Individuals are altruistic.

• Bequest motive: Individuals leave bequests even if there is no quid pro quo.

• Bequest division: Individuals leave more to the child/children with less earnings ability or greater needs (i.e., bequests will be compensatory).

7

(3) The Dynasty Model

• Hypothesis: Individuals care about the perpetuation of the family line or the family business.

• Bequest motive: Individuals will leave behind a bequest only if their child/children carry on the family line or the family business.

• Bequest division: Individuals will leave everything to the child/children who carry on the family line or the family business.

8

Summary re Theoretical Models of Household Behavior

• Thus, we can shed light on which theoretical model of household behavior holds in the real world by looking at data on the bequest motives and bequest division of households.

9

B. History of Bequest Practices

(1) Tokugawa Period (Edo Period) until the early Showa Period (1600-1945)

• Male primogeniture (nationwide)• Male ultimogeniture (southwest Japa

n)• Family branching (southwest Japan)• Sex-neutral primogeniture (Tohoku r

egion)(2) Postwar Japan (1945-present)• Equal division• Testate inheritance

10

(1) Male Primogeniture

• Care of parents, coresidence with parents: Eldest son

• Inheritance of assets: Eldest son

• Inheritance of household headship: Eldest son

⃝�Life cycle model

Ｘ Altruism model

○Dynasty model

11

(2) Male Ultimogeniture

• Care of parents, coresidence with parents: Youngest son

• Inheritance of assets: Everyone gets something but the youngest son gets twice as much

• Inheritance of household headship: Youngest son

○Life cycle model△Altruism model○Dynasty model

12

(3) Family Branching When the eldest son marries, the parents c

ede the family home to the eldest son and his wife and move to a new home taking the younger children with them, etc.

･ Care of parents, coresidence with parents: All children

・ Inheritance of assets: Equal division or more to the eldest son

・ Inheritance of household headship: Eldest son

○Life cycle model△Altruism model○Dynasty model

13

(4) Sex-neutral Primogeniture

• Care of parents, coresidence with parents: Eldest child

• Inheritance of assets: Eldest child

• Inheritance of household headship: Eldest child

○Life cycle modelＸ Altruism model○Dynasty model

14

(5) Equal Division

• Care of parents, coresidence with parents: Not predetermined

• Inheritance of assets: Equal division

• Inheritance of household headship: None

×Life cycle model○Altruism model×Dynasty model

15

(6) Testate Inheritance

• Care of parents, coresidence with parents: Not predetermined

• Inheritance of assets: Divided according to the will (but everyone gets at least their legally secured share)

• Inheritance of household headship: None

○Life cycle model○Altruism model○Dynasty model

16

Summary re History of Bequest Practices

• Prewar bequest practices are most consistent with the dynasty (and life cycle) models.

• Postwar bequest practices are consistent with the altruism model if no will is left but can be consistent with any model if a will is left.

• Thus, each bequest practice is consistent with more than one theoretical model of household behavior, and thus it is not possible to say which model applies in Japan just from looking at bequest practices, but fortunately, survey data on bequest motives are available.

17

C. Survey Data on Bequests

Data Sources:(1) Survey on the Financial Asset

Choice of Households (every 2 years since 1988)

(2) The Comparative Survey on Savings in Japan and the United States (1996 only)

Both conducted by the Institute for Posts and Telecommunica-ions Policy of the Japanese Government

18

Data on the Strength of Bequest Motives

• Intended bequests 25.7%/45.9%

• Unintended bequests 70.1%/51.1%

• Subtotal 95.8%/97.1%

• No bequests 4.2%/2.9%

(Japanese figure/U.S. figure)

　 ↓Bequest motives are much stronger in

the U.S. than they are in Japan.

19

Data on the Nature of Bequest Motives

(1) Life cycle model• No bequest motive 4.2%/2.9%• Unintended bequests 70.1%/51.1%• Conditional on care 6.4%/3.3%• Total 80.7%/57.3%

(2) Altruism model• Unconditional bequests 19.3%/42.6%

(3) Dynasty model: No data

20

Data on Bequest Division

(1) Life cycle model• More to care provider 31.0%/2.4%• No bequests 4.2%/2.9%Total 35.2%/5.3%(2) Altruism model• Divide equally 46.7%/93.4%• More to poorest child 2.3%/0.5%Total 49.0%/94.0%(3) Dynasty model• More to eldest child 7.3%/0.4%• More to child who carries on the

family business 6.6%/0.0%Total 13.9%/0.4%

21

Summary re Data on Bequests

All of the survey data on bequests suggest that the Japanese are much more selfish (and also more dynastic) than Americans and conversely that Americans are much more altruistic than the Japanese.

22

D. Data on Willingness to Help Others

• Parents: 86.4-88.6%

• Spouse’s parents: 84.4-84.8%

• Children: 91.6-91.9%

• Brothers and sisters: 60.3-61.6%

-----------------------------------------

・ Friends: 19.4%

・ Acquaintances: 11.2%

・ Disaster victims: 49.3%

・ Strangers: 1.6%

23

Related data for the U.S.

Bolton and Katok (1998)

Konow (2004)

55-57% of “dictators” give gifts to fellow students

82% of “dictators” give gifts to charitable organizations

suggests that Americans are more

altruistic than the Japanese

24

E. Empirical Analyses(1) Analyses of the impact of parental

bequest motives and parental assets on the behavior of children

Noguchi et al. (1989) Komamura (1994) Horioka et al. (1996, 2000, 2001) Yamada (2003) find that parents are more likely to l

ive with and receive financial support and care from their children if they intend to leave a bequest.

25

(1) (continued)

Komamura (1994)

Ohtake and Horioka (1994)

find that parents are more likely to live with and receive financial support from their children if they hold more assets, especially housing assets.

Suggests that children are living with a

nd providing care and financial assistance to their parents not out of altruism but because they have their eye on their parents’ assets.

26

(1) (continued)

Comparable evidence for the U.S.:

Bernheim, Shleifer, and Summers (1985) find that parental assets have a significant impact on the frequency of visits and telephone calls by children to their parents.

suggests that American children a

re also selfish, providing attention to their parents in order to receive a bequest.

27

(1) (continued)Comparable evidence on the U.S.

(continued)Yoon Lee and Horioka (2004)Parents receiving major financial

help from their children are less likely to leave bequests.

This suggests that American child

ren are altruistic, providing financial assistance to their poor parents even if they cannot expect to receive a bequest.

28

(2) Analyses of the impact of public pensions on consumption and saving

If individuals are selfish, the net transfer from the public pension system should have a significant impact on consumption and saving behavior, and if individuals are altruistic, they should not, but Takayama, Funaoka, Ohtake, et al. (1990) obtain inconclusive results.

29

(3) Analyses of the impact of the intrafamily distribution of resources on the consumption patterns of families

If individuals are altruistic, the distribution of resources within extended families should not affect their consumption patterns (the neutrality hypothesis), but Hayashi (1995) finds that the higher the proportion of income earned by the parents’ generation, the more skewed consumption patterns are toward consumption goods preferred by the parents’ generation and conversely. Individuals are not altruistic in Japan.

30

(3) (continued)Comparable evidence for the U.

S.:Altonji, Hayashi, and Kotlikoff (1

992) find that one’s own resources affect one’s consumption even after controlling for extended family resources and that extended family resources have only a modest impact on one’s consumption after controlling for one’s own resources.

suggests that Americans are also not altruistic.

31

(4) Analyses of intergenerational differences in lifetime incomes

If individuals are altruistic, lifetime incomes should be equalized across cohorts, but Saito (2001) finds that they are not in either the U.S., the U.K., or Japan individuals in none of these countries are altruistic.

32

(5) Analyses of the impact of tax policy on consumption

Watanabe, Watanabe, and

Watanabe (2001) analyze the impact of tax policy on consumer spending in Japan and find that tax changes have a significant effect on consumer spending and that the null hypothesis that the fraction of Ricardian (altruistic) consumers is zero cannot be rejected.

33

(6) Economic experiments concerning the voluntary provision of public goods

　　　 Cason, Saijo, and Yamato

(1997)

Americans are selfish

Japanese are spiteful

Neither are altruistic

34

(7) The saving behavior of the aged

Hayashi, Ando, Ferris (1988) Ishikawa (1988)(a) Dependent elderly: Dependent elderly continue sa

ving until they reach their 80s and dissave thereafter.

(b) Independent elderly: Independent elderly who are si

ngle, who are in their 80s or older, and/or who are retired dissave.

35

(7) (continued)

Horioka et al. (1996)

Independent elderly dissave after age 70, independent elderly who are retired dissave after age 60

Family Income and Expenditure Survey, 1995-2002

Households with one or more retired elderly dissave at a rate of –5 to –20 percent (even faster if conceptual deficiencies are corrected for)

36

(8) The impact of the age structure of the population on the saving rate

Horioka (1989, 1997), etc.

Analyses using cross-country, cross-prefectural, and time series data show that the age structure of the population (in particular, the share of the elderly population) has a significant impact on the saving rate, as expected.

37

The Conclusion from Empirical Analyses

Virtually all of the empirical evidence suggests that, in Japan, the selfish life cycle model applies and that the altruism model does not apply, both absolutely as well as relative to other countries.

38

F. Overall Summary

• In both countries, no model of household behavior is of dominant importance and the three models coexist.

• The selfish life cycle model is the most applicable model in both countries but it is especially applicable in Japan.

• The dynasty model is more applicable in Japan than it is in the U.S. but it is not of dominant importance even in Japan.

39

• The altruism model is far more applicable in the U.S. than it is in Japan.

↓

The Japanese are selfish!

Thus, the conventional assumption about household behavior (namely that they maximize their own utility) is correct after all!

40

G. Policy Implications

• The Effectiveness of Fiscal Policy

The fact that the selfish life cycle model applies in Japan implies that tax cuts financed by the issuance of long-term government bonds will be effective as a means of stimulating consumption because consumers will not take account of the increased tax burden on later generations.

41

• The Intergenerational Transmission of Wealth Inequalities

If bequests are large and unrequited, they will cause wealth inequalities to be passed on from generation to generation. However, in Japan, bequests are primarily a quid pro quo for care and financial assistance during old age. Thus, net transfers are not necessarily large and wealth inequalities will not necessarily be passed on from generation to generation.

42

• The Impact of the Aging of the Population on the Household Saving Rate

Japan’s population is aging at the fastest rate in human history and will soon become the most aged population in the world, and since the elderly dissave during retirement, the household saving rate will decline sharply as Japan’s population ages.

43

Intergenerational Transfers in the Case

of the Life Cycle Model

Bequests

Children Parents

Care and financial assistance to aged parents

Net transfers (bequests from parents to children – transfers from children to parents) will not necessarily be large or even positive

44

H. Conclusion

The fact that the selfish life cycle model applies in Japan implies that tax cuts will be effective and that wealth inequalities will not necessarily be passed on from generation to generation.

　　　　　　　　　　　↓ Thus, the fact that the Japanese are

selfish is good not only for each individual but also for society as a whole.

　　↓Adam Smith was right after all about

the “indivisible hand”!