Rotten Kid Theorem

The Rotten Kid Theorem states that in a family with a wealthy altruistic parent  – even selfish kids – can have a financial incentive to be harmonious and kind to their siblings.

This theory of family behaviour was first proposed by Gary Becker in an article (1974). “A Theory of Social Interactions”. He later expanded on the idea in ‘a Treatise on the Family’ (1981)

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Assumptions of the Rotten Kid Theorem

  1. We start off with a wealthy family head. This head of the family is altruistic and wishes to give money to help his children.
  2. Parents have perfect information about the welfare of their children.
  3. Parents will use their wealth to compensate for any misfortune to their child.
  4. Parents care equally about the happiness of each child.

With these assumptions, it is claimed that even if the family has a selfish, badly behaved child. The financial gifts from their parent give them an incentive to be well-behaved.

  • If the selfish child, (Tom) was mean and unkind to their sibling (Wendy), Wendy would be worse off. For example, Tom destroyed all of Wendy’s toys.
  • The altruistic parent would then offer additional help to Wendy (the sibling impoverished by the unkind actions of Tom). However, because the parents compensate his sister, his parents have less money and Tom would receive lower payments in the future.
  • Therefore, Tom would gain less financial rewards from his parents if he was mean to his sister.
  • If Tom knows the altruistic behaviour of his parents, then he has a financial incentive to be harmonious. If he creates problems in the family, he will lose out. The rotten kid learns to be harmonious to help maximise the total income of the family and therefore the total payments he will receive.

Rotten kids and inheritance

A more obvious use of the rotten kid concept is that parents will plan to bequeath their inheritance to their kids. If one of their children are badly behaved there is always the threat they will not receive anything in the will.

The prospect of an inheritance can encourage even selfish children to look after the welfare of their parents.

Drawbacks of Rotten kid theorem

Leisure and income. It assumes children make decisions on maximising income rather than decisions about choosing leisure activities. For example, when deciding whether or not to take drugs, children are not considering how to maximise total income in the future, but how they think they can maximise their leisure time.

Impulsive actions. A ‘Rotten kid’ is more likely to act impulsively than to rationally consider long-term income maximisation.

Problem children need more attention. It may be possible for a selfish kid to choose an action that reduces family income but makes it cheaper or more necessary to invest in their utility rather than their siblings. For example, problem child needs expensive drug rehabilitation programme. All the parents’ money goes on helping their severe problem.

More to life than money. Another issue of this economic evaluation of family behaviour is that most parents don’t ostensibly offer financial gifts throughout life. The most important thing is the concern, love and care of parents. For example, picking up children from school, taking them on trips. This is often more important than financial aid. Children may compete for the affections of their parents and see it as a zero-sum gain rather than see it as equalising issue.

Conclusion

Despite obvious drawbacks and limitations, it is a thought-provoking example of how incentives can influence behaviour. In one regard it has parallels with Adam Smith’s Wealth of Nations – the idea that individuals pursuing their own selfish ends can benefit the common good.

“It is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard to their own interest.”

Here there is a slight difference in that to maximise their income, they have to be kind and harmonious.

What about reality?

In reality, do selfish kids look after their family members? To some extent, yes. Family bonds are strong; even in mafia families, bad criminals can show great care to siblings and family members. But, these actions are rarely out of maximising income per se, but the strong personal, emotional and even genetic predisposition to help people in the same family.

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