Why Do Parents Spend on Children's Expensive Education?—A Psychological Game Theory Perspective

ABSTRACT Empirical evidence suggests that parents spend a significant part of their income on expensive tertiary education for their children. We model such intergenerational transfers as a psychological game between a parent and a child. First, the parent decides whether to spend on an expensive, high‐quality education for her child. Next, the child decides whether to improve his parent's economic status by transferring part of his income to offset parental spending on education. We consider positive returns to high‐quality education and to guilt‐averse decision‐makers, and outline the conditions for the existence of Bayesian sequential equilibria.