From Consumerist, a poll about allowances and chores. The post links to a Kiplinger article discussing allowance.
I am of the "allowance is not a tit-for-tat chore-based service fee" camp. I believe household chores are done because the kid is part of the household. I had already run into the problem of the kids not being motivated by money anyway.
The Kinplinger article just touches on the amount. That was the biggest problem I had with allowance. I originally ran across a suggestion of $1 per week for each year in the child's age. It turns out that I just don't go shopping with the kids that much. You would be amazed at how that kind of money can pile up after six or eight weeks ($30 or $64 respectively for my kids).
I decided that age was an appropriate way to judge amount--as long as children gain responsibility with age. It would not be just to give an older kid more money just because they are older. They should be doing more because they are older. I decided that 1/2 their age per week would be enough.
With that money I expect them to pay for any toys, occasional treats, or any other thing that suits their fancy that I didn't suggest. If there is a toy I want them to have, or a movie I offer to take them to, I pay. I still buy birthday presents and give them money to buy presents for the family.
I like the idea of offering the children extra money for additional chores outside of their usual responsibilities. I'd give the kids $1 to scoop the litterbox everyday or $5 if it had been over a week. That gives them an opportunity to earn money for something they would normally have to save for a very long time to get.
As for what the kids do with their allowance, I know there are differing opinions. If you give your kid a lot of money, they should pay for their own birthday and Christmas presents to family and friends. You may also want them to be responsible for their own clothing budget (something I'm looking at this year since my eight year-old won't wear half the clothes she asked me to get her). Some people insist their children save some of their allowance, give away some of their allowance, and then can do whatever they want with the rest. I would prefer my children to learn their money lessons on their own. Isn't that one of the primary reasons I give them an allowance in the first place? I do not dictate that they do anything specific with their money.
I can already see that both of my kids have different money styles. My oldest is pretty conservative with her money. My youngest likes to spend whatever money she can. She's already seen how that leaves her with nothing when the oldest can afford a really neat toy.
Susan Crawford has a pamphlet available that deals with kids and money issues. She recommends allowing your kids to start a business. I also found this great little book Kid Biz. My eldest has been trying to start a house-sitting business with our neighbors, but no takers yet.