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    1. Blow: Senior Research Economist, Institute for Fiscal Studies, London, UK. Phone +44-20 7291 4800, Fax +44-20 7323 4780, E-mail
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    1. Walker: Professor, Lancaster University Management School, Lancaster, UK. E-mail
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  • YU ZHU

    1. Zhu: Senior Lecturer, School of Economics, University of Kent, Canterbury, Kent, UK. Phone +44-1227 827438, Fax +44-1227 827850, E-mail
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    • This research was funded by Her Majesty's Treasury's Evidence Based Policy Fund with the support of the Department for Education and Skills, Department of Work and Pensions, Department of Culture, Media and Sports, and the Inland Revenue. The work was completed while Walker was a visiting fellow at Princeton University, funded by the Leverhulme Trust. Material from the Family Expenditure Survey is Crown Copyright and has been made available by the Office of National Statistics through the Economic and Social Research Council's Data Archive at the University of Essex. The data is used with the permission of Her Majesty's Stationery Office but can be made available to other researchers under conditions imposed by the Archive. We are grateful for comments from an anonymous referee, Mike Brewer at the Institute for Fiscal Studies, Mike Bielby, Ilona Blue, and Mario Pisani of the Inland Revenue, Andrew Oswald at Warwick, and seminar participants at the Department for Education and Skills, the Department of Work and Pensions, the University of Warwick, the University of Kent, the Cardiff Business School, and Queen Mary and Westfield College of the University of London. The opinions expressed in this paper are those of the authors.


Governments, over much of the developed world, make significant financial transfers to parents with dependent children. For example, in the United States the recently introduced Child Tax Credit (CTC), which goes to almost all children, costs almost $1 billion each week, or about 0.4% of GNP. The United Kingdom has even more generous transfers and spends an average of about $30 a week on each of about 8 million children—about 1% of GNP. The typical rationale given for these transfers is that they are good for our children and here we investigate the effect of such transfers on household spending patterns. In the United Kingdom such transfers, known as Child Benefit (CB), have been simple lump sum universal payments for a continuous period of more than 20 years. We do indeed find that CB is spent differently from other income—paradoxically, it appears to be spent disproportionately on adult-assignable goods. In fact, we estimate that as much as half of a marginal dollar of CB is spent on alcohol. We resolve this puzzle by showing that the effect is confined to unanticipated variation in CB so we infer that parents are sufficiently altruistic toward their children that they completely insure them against shocks. (JEL I38, D79, D12)

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