Family transfers in rural Mexico: An application to risk sharing and labor supply elasticity

This paper presents a model of labor supply and consumption in a family where adult children support their retired parents. Such a family arrangement is common throughout the developing world. I show that this family arrangement creates complete risk sharing within the family. Within a family, children's wages vary exogenously. These wage shocks determine both potential income and the price of leisure for each child. The model yields three testable predictions. Compared to their low wage siblings, children with high wages (1) send more money home to support the retired parents, (2) work more hours, and (3) consume more substitutes and fewer complements for leisure.; I develop two novel instruments for wages: school calendar during childhood and weather during childhood. I then apply my instruments to data taken from the 1970 and 2000 Mexican Census. Empirical results are consistent with all three predictions: (1) children who receive an exogenous wage increase of 10% send home enough transfers to increase their parent's consumption by 6%; (2) men who receive an exogenous wage increase of 10% during childhood work 4% more hours throughout their lives; and (3) men who receive an exogenous wage increase of 10% own 2%-4% more cars (substitute for leisure), own 2%-3% fewer televisions (complement for leisure), and consume the same quality of food (separable from leisure).