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Saturday, April 26, 2003

Dismal Advice

In the Financial Times new magazine, unveiled today, a new "agony aunt" column made its debut:

Dear Economist,

Both my children did well in school and got high marks in top universities, but my son devotes his energies to pop music and various "good causes", and his living conditions are terrible. I want to give him money now, but how much? And how should I tell my daughter, who is studying to be a lawyer?

-- Mr BD, Hampstead

Dear Mr BD,

First you need to sort out whether you want to wean your son off his current unprofitable career, or whether you merely want to make your son happier in his own choice.

In other words, are you partially trying to maximise your own utility, which values having a conventionally successful son, or do you have a pure bequest motive which subsumes your happiness in your son entirely into his own preferences?

If you are seeking conventional success, you need to raise the relative returns of a respectable career, increasing the opportunity cost of his current dissolute lifestyle.

But you must be careful not to fall into the time-inconsistency trap of promising him large amounts of cash up-front to, say, go to law school. If he is at all rational, he will sign on at law school, wait until the money has landed in his account, drop out and go back to his former associates.

Instead, find a way to give him money at each stage of a successful career - so much for graduating, so much for taking articles, so much for becoming a partner.

Whether this works depends on what his utility function is. He may value what he does so highly that almost no sum of money will make him change his behaviour.

On the question of your daughter, you can tell her whatever you like, but you should give her nothing. Since she has chosen a respectable career path on her own, and seems likely to succeed in it, she satisfies both potential conditions for your utility, and any money you give her would simply be a waste of valuable incentive.

I don't know is this is meant to be taken very seriously or is merely a mild amusment. In the meantime, feel free to send your questions to economist@ft.com.

UPDATE: In response to a comment, I've edited the end of this post.