IZA DP No. 1487 What Can Happiness Research Tell Us About Altruism? Evidence from the German Socio-Economic Panel Johannes Schwarze Rainer Winkelmann D I S C U S S I O N P A P E R S E R I E S Forschungsinstitut zur Zukunft der Arbeit Institute for the Study of Labor February 2005

What Can Happiness Research Tell Us About Altruism? Evidence from the German Socio-Economic Panel Johannes Schwarze University of Bamberg, DIW Berlin and IZA Bonn Rainer Winkelmann University of Zurich, CEPR and IZA Bonn Discussion Paper No. 1487 February 2005 IZA P.O. Box 7240 53072 Bonn Germany Phone: +49-228-3894-0 Fax: +49-228-3894-180 Email: iza@iza.org Any opinions expressed here are those of the author(s) and not those of the institute. Research disseminated by IZA may include views on policy, but the institute itself takes no institutional policy positions. The Institute for the Study of Labor (IZA) in Bonn is a local and virtual international research center and a place of communication between science, politics and business. IZA is an independent nonprofit company supported by Deutsche Post World Net. The center is associated with the University of Bonn and offers a stimulating research environment through its research networks, research support, and visitors and doctoral programs. IZA engages in (i) original and internationally competitive research in all fields of labor economics, (ii) development of policy concepts, and (iii) dissemination of research results and concepts to the interested public. IZA Discussion Papers often represent preliminary work and are circulated to encourage discussion. Citation of such a paper should account for its provisional character. A revised version may be available directly from the author.

IZA Discussion Paper No. 1487 February 2005 ABSTRACT What Can Happiness Research Tell Us About Altruism? Evidence from the German Socio-Economic Panel��� Much progress has been made in recent years on developing and applying a direct measure of utility using survey questions on subjective well-being. In this paper we explore whether this new type of measurement can be fruitfully applied to the study of interdependent utility in general, and altruism between parents and children in particular. We introduce an appropriate econometric methodology and, using data from the German Socio-Economic Panel for the years 2000-2002, find that the parents��� self-reported happiness depends positively, albeit not very strongly, on the happiness of adult children who moved out. JEL Classification: D6, D64, C25, J10 Keywords: utility function, extended family, fixed effects, ordered probit Corresponding author: Rainer Winkelmann Socioeconomic Institute University of Z��rich Z��richbergstr. 14 8032 Z��rich Switzerland Email: winkelmann@sts.unizh.ch ��� We thank Guido Heineck, Rafael Lalive, Gert Wagner, Christoph Wunder and seminar participants at Berlin and Philadelphia for helpful comments.

1 Introduction In economics, altruism is commonly defined in terms of behavior. The standard definition involves a transfer: an altruist reduces his or her own wealth or consumption in order to increase the wealth or consumption of a beneficiary. Often, altruism is studied in the context of a family, where the benefactor is the parent and the beneficiary is the child.1. The altruism hypothesis says that parents make transfers to their children because they care for their well-being per se, without expecting to be ���paid back��� and have a direct material benefit in return. Becker (1974, 1981, 1991) formalized parental altruism within a framework of utility maximization under interdependent preferences. Past empirical studies of altruism have focussed on predictions of the model, such as the implied correlation between transfer payments and income, rather than on the preference structure per se. We argue that such a direct analysis is now overdue since much progress has been made in recent years on developing and applying a direct measure of utility using survey questions on subjective well-being, or happiness. In fact, economically motivated empirical research on the determinants of individual happiness has boomed (see e.g., Frey and Stutzer, 2001, 2002, Blanchflower and Oswald, 2004). However, relatively few studies have investigated whether and how happiness between persons is interdependent. Exceptions include Winkelmann and Winkelmann (1995) who document a large negative effect of a husband���s unemployment on the happiness of the spouse, and Winkelmann (2005) who models the intra-family correlation of subjective well-being using a hierarchical random-effects model. In this paper, we explore whether this new type of measurement of utility can be fruitfully applied to the study of the nature of interdependent preferences in general, and altruism between parents and children in particular. In the spirit of Becker���s seminal analysis and many papers that followed, we concentrate on 1Altruistic behavior can of course also be found among non-related individuals. Recent experimental research considers cases where the ���benefactor��� incurs costs to punish the ���beneficiary���, an instance of so-called altruis- tic punishment, which may be applied to a norm-violator or non-cooperating person in a situation that requires cooperation (see for example Fehr und Fischbacher, 2003) 1

altruism within the extended family. One reason for this is pragmatic, as we have access to survey data on happiness of parents and adult children. A second reason is substantive, since knowing whether transfers of income, wealth and in-kind services between family members are driven by altruism, exchange or joy of giving is crucial for efficient reforms of old age security, long-term care and social assistance. It can be shown, e.g., that attempts by governments to redistribute income between generations can be neutralized if families are altruistic, since if the income of a beneficiary of an altrustic transfer is increased, that transfer will be reduced by an equal amount (see Laferr��ere and Wolff, 2004, for a current survey of the literature). The majority of empirical papers estimate inter household transfer equations where the amount of transfers from parents to children is regressed on the parents��� income and income of the child together with other variables. Subsequently, tests can be set up to verify predictions from the model of altruistic families. However, this approach requires specific data on transfer payments between family members, and our suggestion to test for altruism with widely available happiness responses therefore constitutes a potentially useful alternative. Section 2 describes the data from the German Socio-Economic Panel Study (SOEP). A descrip- tive analysis of happiness interdependencies between parents and their children is given in Section 3. In Section 4 we consider a simple model of altruistic families as the starting point for testing altruistic preferences empirically. We find that the identification and estimation of the altruism parameter faces a number of obstacles that are subsequently addressed in the econometric analysis. In a nutshell, the correlation in happiness between parents and children is not a good measure of altruism, since it ignores omitted variables as well as the simultaneity (or reflection) problem. Panel models with individual specific effects and instrumental variable estimators can address these issues. We discuss models with and without the simplifying assumption of cardinality of the or- dered happiness responses. The regression results are presented in Section 5. Finally, Section 6 concludes. 2