Rotten kid theorem

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Gary Becker's theorem of social interaction, colloquially known as the rotten kid theorem, suggests that family members, even if they are selfish, will act to help one another if their financial incentives are properly linked. The theorem is one of the most famous theorems within family economics.

Becker creates a hypothetical situation in which children will receive gifts of money income from a wealthy, altruistic parent in order to make them happy. One of the children is a selfish, "rotten", child who would take pleasure in harming his sibling. The theorem is that the rotten boy has an incentive to avoid hurting his sister and will in fact behave in such a way as to increase her happiness because her happiness has a direct effect on the amount of money he will receive. Without creating any formal incentive structure, the altruistic parent can induce the rotten child to behave benevolently by making his welfare contingent upon the welfare of his sibling.

The theorem suggests that parents should delay gifts of money to their children until they are older, or possibly until after they die. If parents plan to will their children money in accordance with their needs, each child will have an incentive to help his siblings maximize their income because higher earnings by the other siblings will mean that more of the money will be given to the rotten sibling.

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