Housing inheritance, financial assistance, and reciprocal interdependence

When adult children expect that their parents will bequeath residential property to them, they may show their appreciation by providing their parents with financial support. This paper theoretically and empirically examines this possibility. We adopt a simple noncooperative game framework with a Stackelberg equilibrium to examine the reciprocal interdependence between the propensity of housing inheritance and financial assistance when formal care affects decision-making. We use data from Japanese households to test this interaction. After considering both the censoring of financial transfers and the specification of inheritance propensity, which we control for using information on formal care, our empirical results suggest that the propensity to inherit the parental home has a significantly positive impact on the amount of transfers from children to their parents. Consequently, an implicit annuity contract in the form of an intrafamily reverse mortgage appears to exist in Japanese society. However, parents should ensure they convey to their children a high expectation of future housing inheritance to extract sufficient financial assistance for their current consumption needs