This action might not be possible to undo. Are you sure you want to continue?
The Dissertation Committee for Tansel Yilmazer certiﬁes that this is the approved version of the following dissertation:
Household Saving Behavior, Portfolio Choice and Children: Evidence from the Survey of Consumer Finances
Daniel T. Slesnick, Supervisor Don Fullerton Maxwell B. Stinchcombe Peter J. Wilcoxen Jacqueline Angel
Household Saving Behavior, Portfolio Choice and Children: Evidence from the Survey of Consumer Finances
by Tansel Yilmazer, B.S., M.A.
DISSERTATION Presented to the Faculty of the Graduate School of The University of Texas at Austin in Partial Fulﬁllment of the Requirements for the Degree of DOCTOR OF PHILOSOPHY
THE UNIVERSITY OF TEXAS AT AUSTIN December 2002
United States Code. All rights reserved.UMI Number: 3110711 ________________________________________________________ UMI Microform 3110711 Copyright 2004 by ProQuest Information and Learning Company. ____________________________________________________________ ProQuest Information and Learning Company 300 North Zeeb Road PO Box 1346 Ann Arbor. This microform edition is protected against unauthorized copying under Title 17. MI 48106-1346 .
guidance and encouragement. Matias Fontenla. Maxwell Stinchcombe.’ First. o ¸ and Vivian Goldman-Leﬄer for their stimulating conversations and friendship. I am indebted to my family for their love and believing in me over these years. Angela Lyons. Daniel Slesnick. Steve Trejo. Adam Winship. Anne Golla. in spite of the thousands of miles between us. G¨rkem Celik. Finally. Anne Gorney. I would like to thank my advisor. I wish to thank Fikret for always being there for me. iv . for his support. patience. Special thanks go to Asli Kes. I would also like to thank my committee members Don Fullerton.Acknowledgments I am grateful to many people who shared the best and worst moments of ‘my dissertation years. Mala Velamuri. Peter Wilcoxen and Jacqueline Angel for their valuable feedback and comments.
The ﬁrst chapter examines how the number of children living in the household aﬀects the way households allocate their wealth across diﬀerent assets. Ph.’ and (iii) to accumulate for anticipated future needs. Tansel Yilmazer. (ii) to build up reserves as a precaution for a ‘rainy day. v . The University of Texas at Austin. risky assets and interest-bearing accounts. The portfolio allocation of homeowners is compared to that of renters by taking into account the portfolio constraint imposed by the consumption demand for housing. As a result of the portfolio constraint. such as educational expenses. Portfolio Choice and Children: Evidence from the Survey of Consumer Finances Publication No. such as owner-occupied housing. this dissertation examines the relationship between having children and the motives of saving: (i) to hold assets because of the return they provide. Slesnick Using the Survey of Consumer Finances (SCF). The results show that the number of children increases the housing consumption of homeowners and the share of the portfolio allocated to owner-occupied housing. 2002 Supervisor: Daniel T.D.Household Saving Behavior.
Using the actual college expenditures reported in the 1983-86 SCF. Further. The results show that households with higher income uncertainty are less likely to have a child.homeowners decrease the share of the portfolio invested in retirement assets as the number of children increases. By examining the implications of income uncertainty on the demand for children. income uncertainty has little eﬀect on household savings. vi . The results are consistent with the predictions the lifecycle theory of saving that households save in advance for expected expenses to smooth their consumption. The third chapter examines the eﬀect of ﬁnancing children’s college education on household savings. and after controlling for family size. The results show that parents save for college expenses of their children. Also. the empirical model estimates the expected expenditures on children’s college education and investigates the eﬀect of expected college expenses on household savings. the second chapter investigates the relationship between household saving and fertility decisions. this chapter extends the empirical work on precautionary savings. Using a life-cycle model that incorporates precautionary motives for saving. having an additional child reduces savings of households with young heads and increases savings of those with older heads. savings for college increase with the age of the household head.
. . . . . . . . . . Data . . . . . . . . .2 3. . . . . . . . . . . . . . . . . . . . . 2. . . . . The Relationship between Fertility and Saving . . .4 3. Chapter 3. . . . . . . . . . . . . . . . Estimation and Results .4 Estimation and Results .5 Conclusion . . . . . . . . . . . . . . . . . . vii . . .2. . . . . 2. . . . . . . . . . . . . . . . . . . . . . .3 Data . . . . . . . . . . . . 3. . . . . . . . .5 The Eﬀect of Precautionary Motives Saving and Fertility Introduction . . .2 Empirical Model . . . . . . . . . . . . . . . . . . . . 2. . . . . . . . . . . 2. . . . . .2. . . . . . . . . . . . . . . . . . . . . . 2. . .3 3. . . . . . . .1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . Introduction iv v ix xi 1 6 6 12 12 15 17 24 30 44 44 48 51 58 63 Chapter 2. . . . . . . . . . . . . . on Household . . . . . . . . . . . . . .Table of Contents Acknowledgments Abstract List of Tables List of Figures Chapter 1. . . . . 2. . . . . . . . . . . . . . . .1 Theory . . . .2 The Model . . . . . . . . . . . . . . . Conclusion .1 3. . . . . . . . . Do Children Aﬀect Household Portfolio Allocation? 2. . . . . . . . . . . . . .
4 Empirical Speciﬁcation . . . . . . . . . 2 104 . . . .3 Data . . . . . . . . . . . . . . . . . . . .3 Estimating Permanent Income . . . . . . . . . . . 109 Appendix C. . . .1 Deﬁnition of Variables . . . . . A. . . Saving for Children’s 4. . . . . . 106 Appendix B. . . . A. . . . . . . . . . . . . .1 Introduction . . . . .1 Estimating Marginal Tax Rates . 104 . . . 4. . . . Education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 Deﬁnition of Variables . . . . . . . . . . . . . . . . . . . . . . . . . 4.5 Estimation and Results . . . . . 111 Bibliography Vita 113 121 viii . . . . . . . 4. . . . . . . . . . 73 73 80 83 86 88 93 103 Appendix A. . .2 A Model of Saving for College 4. . . . . . . . . . . . . . . . Appendix for Chapter 4 111 C. 105 . . . .1 Deﬁnition of Variables . . 4. . . . . .6 Conclusion . . . . . .Chapter 4. . . . . . . . . . . . . Appendix for Chapter 3 109 B. . . . . . . . . . . . . . . . . . . . . . Appendix for Chapter A. . . . . . . . Appendices College . . . .
Descriptive Summary of Variables . . . . . . .9 2. . . . . Saving Motives By the Number of Children . . . . . . . . . . . . . .8 2. . . . . . .2 4. . Savings and College Expenses by the Number of College . . . . . . . . . .5 Descriptive Statistics by Year . Results: Asset Shares and Housing Expenditure of Homeowners Homeowners: Continued . . .8 4. . . . . . .7 2. . . . . . . . .3 2. . . . .6 2. . . . . Expenditure on Housing. . . . . . . . Mean Asset Shares. . . . . . . . . . . . . . . . . 1983 . . . . . . .5 3. Portfolio Shares for Assets by the Number of Children and Age Saving Motives by Age Groups. . . . . . . . . . . The Eﬀect of a Change in the Fertility Decision on SAVE1 .5 2. . . . . . Mean Income Uncertainty by Household Demographics . . . . . . . . Results: Asset Shares and Housing Expenditure of Renters . . . . . . 1998 . Renters: Continued . .1 4. . . . . .2 3. . . . . . . . . .3 4. . . . . . . . Poisson Regression: Number of Children . . . Mean Asset Shares. .List of Tables 2. . . . . . . . . . . . . . .1 2. . . . . . . . . . . . . . . . . . . . . .11 3. . . Regressions of SAVE1 on Income Uncertainty with Endogenous Fertility Decision . . . . .7 3. . . . . 1998: Continued . Tobit Estimates of College Expenditure Equation ix . . 1998 . . . . Mean Asset Shares by Year .10 2. . . . . . .3 3. . . . . . . . . . . . . . . .4 3. . . Regressions of SAVE2 on Income Uncertainty with Endogenous Fertility Decision . . . . .1 3.4 2. . . . .2 2. . . . . . . Children in . . Results from Probit Estimation . . . .4 4. . . . . . Descriptive Statistics by Household Fertility Decision . . . . . . 33 34 35 36 37 38 39 40 41 42 43 65 66 67 68 69 70 71 72 95 96 97 98 99 . .6 3. . . . . . . . . . . . . . . . . . . . . . . . . . Income and Income Uncertainty by Age and Fertility Probit: Fertility Decision of Fecund Households . . . . . . . . . . . . . Savings. . . . . . . . .
.4. .6 4. 100 101 x . . . . . . . . .7 College Expenditures and Savings by the Number of Children in College . . . . . . . . . . . . . . . . . . . . . . Eﬀect of Anticipated College Expenses on Savings . . . .
List of Figures
The Importance of Educational Expenses on Savings . . . . .
Chapter 1 Introduction
Raising children is costly with their housing, educational and other expenses. To meet the costs of raising their children, parents use both current income and intertemporal transfers. Children living in the household, therefore, are likely to aﬀect the level of household savings, portfolio composition and the life-cycle proﬁle of savings. Using data from the Survey of Consumer Finances (SCF), this dissertation examines the relationship between children and the motives of saving: (i) to hold assets because of the return they provide, (ii) to build up reserves as a precaution for a ‘rainy day,’ and (iii) to accumulate for anticipated future needs, such as educational expenses. Most U.S. households hold a large portion of their wealth in the form of owner-occupied housing. According to the 1995 SCF, 65 percent of households are homeowners, and the value of an average homeowner’s property is 60 percent of its total assets. Owner-occupied housing diﬀers from other types of wealth in its dual role as both a consumption good and an investment good. Since households cannot separate the level of consumption of housing services from investment in housing as an asset, the optimal level of owner-occupied housing may be higher than the optimal level for households only interested
in long run returns. The demand for housing services is likely to increase with the number of children living in the household. Therefore, the consumption constraint can be even more binding for households with children. Chapter 2 uses the 1989, 1992, 1995 and 1998 SCF to investigate how the number of children living in the household aﬀect the portfolio choice between housing and other assets. The portfolio allocation of homeowners is compared to that of renters by taking into account the portfolio constraint imposed by the consumption demand for housing. The empirical model also examines the eﬀect of children on the demand for housing services and homeownership decision. The results show that the number of children increases the housing consumption of homeowners as well as the share of the portfolio allocated to owner-occupied housing. As a result of the portfolio constraint, homeowners decrease the portfolio share of retirement assets as the number of children increases. Low levels of retirement savings of U.S. households have generated signiﬁcant concern in the last twenty years. The ﬁndings of Chapter 2 show that households with children decrease the portfolio share for retirement savings considerably while they increase the portfolio share for housing. If the return on housing is less than the return on retirement accounts, there is a hidden cost of children. Explaining the size of the portfolio eﬀect allows a better understanding of the cost of children. Also, changes in housing programs or tax deduction rules for mortgage interest payments inﬂuence the portfolio allocation of households with children considerably by increasing or decreasing the 2
cost of homeownership. The results of the empirical model in Chapter 3 show that households with higher income uncertainty are less likely to have a child at a point in time. are not consistent with the predictions of the precautionary saving model that suggests agents faced with uncertainty about future income increase their savings. Precautionary saving models predict that uncertainty about future income may cause households to reduce their current consumption in order to raise their stock of precautionary saving. however. By examining the implications of uncertainty on the fertility decisions of households and incorporating fertility decisions as a motive for household saving behavior. this chapter extends the empirical work on precautionary saving. Also.S. This ﬁnding is consistent with the life-cycle theory of saving and consumption and shows that household composition is an important factor 3 . having an additional child decreases savings of households with young heads and increases savings of those with older heads. The 1983-89 panel of the SCF is used to examine the interaction of income uncertainty and changes in the number of children on the saving behavior of households at diﬀerent stages of the life cycle. household saving show that saving rates are higher for married couples with no children and lower for those with children. Income uncertainty actually reduces savings of the households with low or very high wealth holdings and does not aﬀect the saving behavior of other households. The data on U. Using a life cycle model that incorporates precautionary motives for saving. Chapter 3 investigates the relation between household saving and fertility decisions. The ﬁndings.
Chapter 4 estimates the household’s expected expenditures on children’s college education and investigates the eﬀect of expected college expenses on household savings. 90 percent of dependent undergraduate’s parents contributed ﬁnancially to the costs of their children’s education. parents contribute a signiﬁcant amount to their children’s college expenses. The college ﬁnancial aid system imposes an implicit tax on the savings of households that are potentially eligible for ﬁnancial assistance.of life-cycle savings. First. savings for college education increases with the age of 4 . According to the 1996 National Postsecondary Student Aid Survey. This chapter uses the amount of parental expenditure on children’s college education as a measure for child quality. The results show that parents save for college expenses of their children. Chapter 4 examines the eﬀect of ﬁnancing children’s college education on household savings. Of those contributing to their children’s college costs in 1987. an analysis of ﬁnancing college education and family size highlights an important aspect of the quality-quantity model. families who save for college reduce their eligibility for ﬁnancial aid. Third. Second. Given the rapidly rising cost of college tuition. the quality-quantity model of fertility behavior assumes that parents have preferences both for the expenditure per child and the number of children. Using the actual college expenditures reported in the 1983-86 SCF. Also. about 65 percent reported using some previous savings. Understanding the eﬀect of ﬁnancing children’s college education on household saving behavior is important for at least three reasons.
the household head. These results are consistent with the predictions of the life-cycle theory of saving and consumption that households save in advance for expected expenses to smooth their consumption. 5 .
1 The inﬂuence of children living in the household on the portfolio composition has not been yet discussed. Jianakoplas and Bernasek . and Sund`n and Surette  e for gender eﬀects. 1 6 . and interest-bearing accounts. Chiteji and Staﬀord  for race.Chapter 2 Do Children Aﬀect Household Portfolio Allocation? 2.1 Introduction Empirical studies of household portfolio composition have identiﬁed large diﬀerences in portfolio allocation choices of diﬀerent demographic groups. King and Leape . the literature has focused on the impact of demographic variables such as the eﬀect of age. For example. So far. they may hold most of their ﬁnancial assets in riskless See Poterba and Samwick . Conversely. Parents may choose to invest part of their household portfolio in stocks to meet the rising costs of a college education. race and gender of the household head on the portfolio composition. and Ioannides  for age eﬀect. It is likely that children living in the household aﬀect the way a household allocates its wealth across diﬀerent assets such as owner-occupied housing. households with children may purchase more housing than households with no children or they may have a higher probability of owning a home. risky assets.
Using data from the 1989. paying particular attention to the impact of children on the demand for housing services and homeownership decision. The failure of households with children to invest suﬃcient assets in retirement accounts may lead to a lower retirement wealth. Low levels of retirement savings of U. households with children may decrease the portfolio share for other assets considerably while they increase the portfolio share for housing. as the result of higher consumption demand for housing. 7 .form to decrease their families’ exposure to risk. and (iii) the housing expenditure of homeowners and renters. Speciﬁcally. If households with children allocate a larger share of their portfolio to owneroccupied housing. Understanding the size of the impact of children on household portfolio allocation is intrinsically interesting. I analyze a model in which households decide on portfolio shares for diﬀerent assets jointly with the tenure choice (the decision of owning or renting) and the consumption demand for housing services. It has also important policy implications. 1995 and 1998 SCF. then changes in housing programs or tax deduction rules for mortgage interest payments inﬂuence their portfolio allocation by increasing or decreasing the cost of homeownership. Also. I focus on how the number and age of children living in the household aﬀect (i) the homeownership decision. (ii) the portfolio shares for housing and the other assets that homeowners and renters hold. households have generated signiﬁcant concern in the last twenty years. 1992. this chapter investigates the eﬀect of children on household portfolio composition.S.
1992 1995 SCF. and the ownership of their principal residence determines the level of consumption of housing services. and the value of an average homeowner’s property is 60 percent of its total assets. 1989. and both report that owner-occupied housing accounts for about 30 percent of household assets.2 In the presence of tax distortions and transaction costs. 2 See Henderson and Ioannides  and Berkovec and Fullerton  8 . Explaining the size of the portfolio eﬀect allows a better understanding of the cost of children. The optimal level of owner-occupied housing for households may be higher than the optimal level for households that are only interested in long run returns. households hold a large portion of their wealth in the form of owner-occupied housing. Households with children are likely to have a higher demand for housing services and the consumption constraint can be even more binding. households cannot separate the level of consumption of housing services from investment in housing as an asset. its impact on the portfolio choice between housing and other assets has not been discussed much. Owner-occupied housing diﬀers from other types of wealth in its dual role as both a consumption good and an investment good. According to the 1995 SCF. Exceptions are the theoretical model of Brueckner . While the dual role of housing has been recognized.S. Brueckner analyzes the behavior of homeowners. 65 percent of households are homeowners.Most U. the general equilibrium model of Berkovec and Fullerton  and the numerical analysis of Flavin and Yamashita . and King and Leape  examine the 1960-62 Michigan Surveys of Consumer Finances. In his model. Wolﬀ  uses the 1983.
The literature on housing demand has recognized the role of children on the tenure choice and the demand for housing services. Their simulation concentrates on the eﬀect of taxes on the tenure choice and owner-occupied housing. Robst et al. This chapter extends the previous studies of portfolio choice by examining the eﬀect of both consumption and investment motives on the portfolio share for housing and other assets. Neither of these studies explicitly analyzes the determinants of the consumption demand for housing and the portfolio share for housing. Harun et al.  treat the presence of children in the household as endogenous and ﬁnd that a 10 percent increase in the probability of having a child raises the likelihood of homeownership by 2.an investment constraint requires that the quantity of housing owned is at least as large as the quantity of housing consumed. households decide on tenure and quantity of housing taking both consumption and investment motives into account.5 percent. Flavin and Yamashita use numerical methods to calculate the mean-variance eﬃcient frontier. Their results show that the portfolio constraint imposed by the consumption demand for housing causes a life-cycle pattern in the portfolio shares for stocks and bonds such that the ratio of stocks to net worth increases as the household head gets older. For example.  show that 9 . In Berkovec and Fullerton. The results of his model show that when the constraint imposed by housing is binding. the homeowner’s optimal portfolio is ineﬃcient in a mean-variance framework. His model analyzes the resulting distortion of the eﬀect of this investment constraint on the portfolio choice of homeowners.
Ihlanfeldt  reports housing demand estimates obtained separately from two samples-recent movers and nonmovers. Goodman and Kawai  ﬁnd that larger households prefer more housing. The results of the previous studies show that dependent children have some impact on the demand for housing. Besides housing. However. their results show that the presence of children in school has either an insigniﬁcant or a negative eﬀect on the demand for housing. 401(k)s. households typically invest in only a few of the assets available in the economy. For example. these variables do not aﬀect the housing demand of homeowners. according to the 1995 SCF. however. Many studies have investigated the reasons that most households choose to hold incomplete portfolios. and race of the household head are shown to be signiﬁcant factors that reduce the level of information cost that would be suﬃcient to 10 . Demographic characteristics such as age. Among recent movers. as noted in Goodman . the importance of the current and expected family size diﬀers between owners and renters: while renters demand more housing with an increase in family size and expectation of an additional child within the next nine months.an additional child increases the probability of owning a home by around 8 percent. After controlling for the household size. The information cost of monitoring and managing a portfolio is suggested as an important reason for holding riskless assets. only 41 percent of households held stocks directly or indirectly in IRAs. marital status. deﬁned beneﬁt pensions and mutual funds. little systematic treatment of children has appeared in the estimation of tenure choice and housing demand. U.S.
King and Leape  analyze a model in which investors choose to hold incomplete portfolios. however. and they estimate equations for both the probability of owning an asset and its demand conditional upon ownership. For example. Their ﬁndings show that age and marital status of the household head signiﬁcantly aﬀect the probability of asset ownership. Bertaut  uses the 1983-89 SCF to analyze the eﬀect of household characteristics on portfolio allocation. This chapter aims to do so by examining the eﬀect of the number and the age of children on household portfolio choice. In the conditional demand equations. The empirical model compares the portfolio allocation of homeowners to that of renters. The theoretical model developed in the chapter shows how the portfolio constraint imposed by the consumption demand for housing aﬀects the portfolio shares for housing and other assets. Children living in the household have not been the focus of any study examining the portfolio choice of households. Using the Panel Study of Income Dynamics. the eﬀect of age and marital status appears to be signiﬁcant only for some of the assets. Their ﬁnding is that parents who held stocks are more likely to have children who hold stocks as young adults. His results show that household characteristics such as age and education of the household head are signiﬁcant in explaining the probability of owning stocks. The results show that the number of children has a positive and signiﬁcant eﬀect 11 . taking into account the eﬀect of children on the consumption demand for housing. Chiteji and Staﬀord  link independent young African-American adults back to their parents.discourage households from investing in risky assets.
4. The remainder of this chapter is organized as follows. As a result of the portfolio constraint imposed by the housing demand of children.2 2. A summary of the ﬁndings and concluding remarks are presented in Section 2.2. The estimation results are reported in Section 2.2 introduces the theoretical model and discusses the empirical speciﬁcation of the model. The number of children also increases the housing demand of homeowners. The main conclusion of the chapter is that homeowners shift their resources from retirement accounts to housing with an increase in the number of children. Following Brueckner  and 12 . Renters invest a smaller share of their portfolio in interest-bearing accounts with an increase in the number of children. homeowners with all children older than age 13 invest a greater share of their portfolio in vehicles and other real estate and a smaller share of their portfolio in housing. The consumer maximizes a multiperiod utility function. Children living in the household also aﬀects the portfolio choice of renters. 2.1 The Model Theory This section examines the behavior of a consumer deciding whether to rent or own a home.3 describes the data set and the variables used in the empirical work. Section 2. and how much to allocate to other risky assets.on the probability of owning a home. homeowners decrease the portfolio share in retirement accounts while they increase the portfolio share in housing. Section 2.5. Controlling for the number of children and other variables.
housing services (hc ).. The j th asset earns a gross return of rj .Henderson and Ioannides . 1. The ﬁrst period budget constraint is given by J c=w− p o hc h − j=0 aj . Short selling is ruled out for all assets including housing. . J. V is an indirect utility function. then she holds owner-occupied housing (h > 0) and is constrained to consume the same amount of owner-occupied housing in her portfolio (hc = h).. with a0 being the riskless asset. (2. 1.. If the consumer purchases a house. The only source of uncertainty is assumed to be from returns on J + 1 assets and owner-occupied housing (h). . and owner-occupied housing earns rh .. The dollar amount of asset j purchased is denoted aj . and consumption in future periods that depends on the random total return R from the investment portfolio. U gives the utility from the current consumption. j = 0. hc ) + δE[V (R + y)]. and δ is the discount factor. E gives the expected utility. A consumer in this economy is assumed to obtain utility from the current consumption of a single nondurable good (c). I assume that third and subsequent periods are buried in the indirect utility function given remaining wealth at the beginning of the second period. The consumer’s objective function can be written as follows: U (c. (2. j = 0.2) 13 .1) where y is future labor income. so that aj ≥ 0. and h ≥ 0. J.
14 .7) where θhh and θjj . . The total return of the J portfolio is given by R= j=0 rj aj .J.5) since h is equal to zero for renters. 2.4) where po r is the price of a unit of housing for renters. j = 1. .6) and (2. then the ﬁrst period budget constraint is given by J c = w − po hc − r j=0 aj .. In the model.3) If the consumer rents a house. (2. h = 0 in equations (2.. the return on housing and the return on other assets are assumed to be normal variables with the expected values rh and rj . (2..6) and the standard deviation J J K σ = (θhh h + 2 j=1 2 haj θhj + j=1 k=1 aj ak θjk )1/2 . and θjh is the covariance of returns between asset j and housing.where w is her initial wealth and po is the current price of a unit of housing.. J. respectively.7). (2. j = 1. θjk is the covariance of returns between asset j and k. For homeowners. h The total return of the portfolio is given by J R = rh h + j=0 rj aj . are the variances of rh and rk . the total portfolio return R is a normal random variable with the expected value J R = rh h + r0 a0 + j=1 r j aj (2. For renters. (2.
and to owner-occupied housing (sh ) is modeled as follows. 2... First.8) subject to (2. I rewrite the objective function (2.. (2.. how much to spend on housing (Eh ).8) where φ(. h∗ . (2.9) where Xh is a vector of year dummies and characteristics that are associated 15 . (2. J. j = 0.2. that maximize (2. σ.) is the standard normal density function. The consumer also decides on c∗ . are chosen optimally with hc and σ held constant.2 Empirical Model The joint determination of whether own a house (H=1) or not (H=0). and a∗ .3). J. (2. (2.. h∗ and a∗ .5). hc ) + δ V (R + σz + y)φ(z)dz. j = c j 0.Following Fama and Miller  and Brueckner .1) subject to (2.4). 1. . that maximize (2.. The empirical model described in the next section focuses on the interaction between these two stages of decision making. j = 0.2). a household determines whether to own or rent a house: H = 1 if Xh β1 + ε1 > 0 = 0 otherwise. and shares of wealth to allocate to each asset j (sj ). In the second stage. . The consumer’s problem is to choose c∗ . J.7).6) and (2. and the standard normal variable z as follows: U (c. the asset levels aj . 1. this problem can be solved in two stages.7) and decides to own or rent a house comparing the utilities in two outcomes.. For both homeowners and renters. In the ﬁrst stage. c j (2. . hc (and thus σ) is chosen optimally.6) and (2. 1.1) in terms of R.
and εoj . respectively.10) (2. In the ﬁrst stage. and εrc are the error terms. βoc and βrc are the parameter vectors to be estimated. βh . and also the housing expenditure: j = 0. J sj = Xβoj + εoj sh = Xβh + εh If owner. the household decides on the share of portfolio allocated to each asset and housing. 1. βoj ... 16 . εh .with the probability of owning a house. log Eh = Xc βrc + εrc . 1. j = 0... and ε1 is an error term.11) where X and Xc are vectors of household characteristics and year dummies. Second. βrj . Separate equations are speciﬁed for homeowners and renters.. a probit model of the tenure choice in equation (2. I use ˆ ˆ φ(X β1 )/Φ(X β1 ).10) for homeowners.11) are assumed to have a joint normal distribution.. J. 1. β1 is a parameter vector. as a regressor in estimating (2. j = 0. εrj . The two stage method described in Lee and Trost  is used to estimate the model. and the error terms in equations (2. j = 0. In the second stage. . .9) provides an estimate of β1 . φ(X β1 )/(1 − Φ(X β1 )) is used as a regressor for renters in estimating (2...11). εoc .. J sj = Xβrj + εrj sh = 0 If renter. log Eh = Xc βoc + εoc . J. .. . Similarly. (2. where φ and Φ are probability density and cumulative distribution of the standard ˆ ˆ normal distribution..9) . 1..(2.
all types of bonds. and in 1998.S. 6) RESTATE includes the market value of seasonal residences and other property. and 7) OTHER includes trusts. 4) HOUSE is the market value of owner-occupied housing. income. a triennial survey conducted by the Federal Reserve Board. the cost of housing services depends on In the 1989 SCF.309 households. and demographic characteristics.519 out of 4. population.3 Data The data for this study are taken from the 1989. 3) RETIRE includes IRAs. Investments in businesses are not included in total assets because they generate an income that is diﬃcult to separate from earnings. For owners.906. The SCF constructs sample weights to blend the supplements with the area-probability sample to get a more representative sample of the U. Each survey consists of a representative sample of the U. in 1992. 2) STOCK includes all assets held in stocks. The consumption demand for housing is computed for renters and homeowners as follows. and other deﬁned contribution plans. call accounts.409 out of 4. Keogh. 1. 1. the supplement consists of 866 out of 3. 401(k)s. 5) VEHICLE is the value of all the vehicles the household owns. 1.S.299. cash value of life insurance.3 Total assets are grouped into six categories: 1) ACCOUNT includes all holdings of checking accounts. and other assets like arts and precious metals. certiﬁcates of deposit. 3 17 . saving accounts. and mutual funds. 1992.480 out of 3.143 households. population and a supplement of high-wealth households drawn from Internal Revenue Service ﬁle of high-income returns. money market deposit accounts. The survey contains detailed information on household portfolios. in 1995.2. 1995 and 1998 SCF.
and the rate of increase in house prices. the income tax rate (τ ).1. Following Henderson and Ioannides .12) This formulation assumes that homeowners claim tax deductions for property taxes and mortgage interest payments. ρ. A few restrictions are imposed on the sample. is the rate of increase in the median sale price of houses in that year. (2. the property tax rate (τp ). the mortgage interest payment (m). is the annual inﬂation rate calculated using the CPI-U deﬂator. π. The inﬂation rate. r. Property tax rates and mortgage interest payments are reported in the SCF. I impute them using detailed account information on the sources of income and demographics for each household. The calculation of marginal tax rates is described in Appendix A.12). households that neither rent nor own their homes are excluded for lack of information to cal18 . For renters. The interest rate. First. I assume an annual rate of depreciation of d=0. the annual rental expenditure reported in the SCF is used as the consumption demand for housing. To calculate the housing expenditure by using equation (2. the interest rate (r). I make several assumptions. The housing expenditures (Eh ) of homeowners are then deﬁned as Eh = [(1 − τ )r + d + (1 − τ )τp − (ρ − π)]G − mτ.the gross value of the residence (G). is assumed to be the interest rate on treasury bills. the rate of increase in the nominal price of housing (ρ) and the overall inﬂation rate (π).015 for each of the sample years. Since marginal tax rates are not reported in the SCF. maintenance and depreciation costs (d).
1992. Table 2.900. 1995.807 households in 1989. The calculation of permanent income follows King and Dicks-Mireaux  and is described in Appendix A.989 observations. both mean and median wealth (ASSET) have risen since 1992. respectively. a co-op or a townhouse association. A household is assumed to be a renter if it rents all or part of the farm/ranch/apartment/house/mobile home in which it lives.5 The ﬁnal sample consists of 13.2. 6 The SCF deﬁnes the head of the household to be the husband for all married households. 3.509. The variables are described in detail in Appendix A. and 1998 SCF.1 shows the summary statistics for all the variables used in the estimation.6 However.1 percent weighted wealth holdings in each wave of the SCF are dropped. or (iii) it owns part or all of the farm/ranch on which it lives on. I take the estimated earnings of the household head and the spouse at the age of 45 and an individual-speciﬁc eﬀect.773 and 3. most of which have not changed much over time. The calculated expenditure of housing consumption (Eh ) A household is assumed to be a homeowner if (i) it owns the house/apartment that it lives in or owns it as a part of a condo. As a proxy for permanent income. 1992. 127. In 1989. 2. Therefore.culate housing expenditure.1 percentile of the weighted wealth distribution in the 1989. 1995 and 1998. 116. 3. respectively. 4 19 . households with female heads are headed by single females. The same pattern is true for permanent income (INCOME). marital status (MARRIED) and gender (FEMALE) of the household head and the fraction of homeowners (HOMEOWN). 1995 and 1998. respectively. 317 and 309 households were neither renters nor owners and were dropped from the sample.4 Second. Sample demographics show the age of the household head (AGE). 214. 209 and 193 were in the 0. 5 Of the remaining households. households with the highest 0. 1992. 183.3. (ii) it owns both the mobile house and the site. to avoid the inﬂuence of extreme outliers on the regression.
The average number of children (NCHILD) living in the household declined from 0. The ﬁrst column shows the share of households in diﬀerent income. The percentage of households with all children older than age 13 (CHAGE13) has stayed the same since 1992.5 percent in 1998.4 percent of total assets in 1998.was higher for homeowners in 1992 than in other years due to the decline in house prices in that year. As shown in Table 2.75 in 1995 and stayed the same in 1998.7 percent of total assets in 1989 to 10. wealth and children (the number of children living in the household) groups. Assets in these accounts increased from 5. The portfolio share for ACCOUNT declined from 14.2. First.83 in 1989 to 0. This suggests that households have substituted ﬁnancial assets for nonﬁnancial assets. the share for RETIRE increases sharply.2 percent in 1998 due to an increase in the portfolio share for saving accounts. HOUSE is the most important asset. but it rose to 13. STOCK and RETIRE in 1998 oﬀset the decline in HOUSE. age.3 percent in 1989 to 11.6 percent in 1998). representing 39.2 percent in 1995. the composition of households’ portfolios reveals the importance of housing as an asset. Second.3 presents housing expenditures of homeowners and renters in 1998. The increases in ACCOUNT. 20 . VEHICLE and RESTATE. Table 2. there is a steady growth in the portfolio share for STOCK and a steady decline in the portfolio share for RESTATE since 1989. Table 2. The second largest asset in the households’ portfolios is VEHICLE (18. followed by ACCOUNT.2 presents interesting changes in household portfolio structures over time.
4 shows the portfolio shares of assets that homeowners and renters hold. in the remaining two columns of the table. wealth. For homeowners.4 and 2. The average housing expenditure is $7. wealth and the number of children in the household.5 show the household portfolio composition in 1998 by household permanent income. Average housing expenditures for homeowners and renters are presented. It also increases with the number of children. the expenditure on housing declines after the age of 65.9 percent. reaching a peak among households with two children. The percentage of households who are homeowners increases with income. respectively. First. For homeowners.000 and income below $50. The ﬁrst row of Table 2.030 for renters. age of the household head. For renters.000. there are marked diﬀerences in household portfolios of renters and owners.The second column indicates the percentage of each of these groups that are homeowners. accounting for 57. wealth and the age of the household head. VEHICLE is the third largest asset (7. This is due to an increase in the value of residences and also to the tax deduction for property taxes and mortgage interest payments that decrease the opportunity cost of homeownership. and the number of children.5 percent of total assets) followed by ACCOUNT (26. it declines after age 50. VEHICLE is the most important asset held (41. however. Among households with wealth below $250.0 percent).8 percent of total assets) following 21 . renters spend more on housing than owners.042 for homeowners and $6. Tables 2. Since the primary residence is the largest part of homeowners’ wealth. for renters. The housing expenditures of renters and homeowners also increase with income.
3 and 2. RETIRE and RESTATE are almost equal for renters and owners.9 percent of their total assets in housing. Several ﬁndings are worth noting. Also. 42. Also. as shown in Tables 2.RETIRE (10. accumulation in STOCK relative to other assets increases over age 65. STOCK is the most important asset category with a share equal to 25. portfolio composition of households with heads over the age of 65 diﬀers considerably from other age groups’ portfolios. Of the households with income above $100. For example. Another noteworthy ﬁnding is that the portfolio shares for STOCK and RETIRE for both homeowners and renters rise with income. in contrast. First.2 percent).7 percent are homeowners holding 75. This suggests that households with heads over age 65 substitute 22 . 86. the portfolio share for ACCOUNT almost doubles both for homeowners and renters over the age of 65 compared to 50-64 year old group.000. the share of the portfolio allocated to STOCK rise at a rapid rate with wealth. of the households with income below $15. The portfolio shares for other assets such as STOCK. For example.4 also presents the life cycle patterns in household portfolios. the fraction of households who are homeowners increases. we observe striking diﬀerences in the composition of portfolios by the level of wealth.7 percent are homeowners. among homeowners that have wealth exceeding $1 million. Not surprisingly.000.6 percent. while the housing share of portfolio declines.6 percent of total assets in housing. Table 2. For homeowners.2 percent of total assets while housing accounted for only 22. For higher levels of income. the share of the portfolio allocated to RESTATE and for all households. but they hold only 42.4.
5 looks at the link between children and shares of assets in both renters’ and homeowners’ portfolios. housing accounts for 56.liquid assets for nonﬁnancial assets.3 investigates the eﬀect of children on the tenure choice. age and wealth are similar. Also. While portfolio composition diﬀers considerably between renters and homeowners.5 reveal striking diﬀerences in portfolio structures across income. and table 2.4 and 2. Homeowners invest a smaller share of their portfolio in interest-bearing accounts and stocks with an increase in the number of children. The portfolio share for owner-occupied housing increases with the number of children. wealth. Children are likely to aﬀect the portfolio structures in two ways. Second. For example.5 shows the portfolio shares by the number of children living in the household. and 65. and the second is their eﬀect on asset shares of portfolios conditional upon ownership. the presence of children increases the share of the portfolio allocated to vehicles. the portfolio share for HOUSE declines with age among the households headed by persons below age 65.3 percent for those with three or more children. Tables 2. Table 2. the relative changes in portfolio shares of assets by income. but it stays steady after age 65. Table 2. and age groups. The ﬁrst is their eﬀect on the choice of tenure.9 percent for households with 2 children. Finally. The table indicates a strong relation between children and the share of portfolio allocated to housing. The results indicate that the number of children living in the household aﬀects the portfolio shares for assets and 23 . 60.0 percent of the wealth for households with no children.
4 Estimation and Results The resulting set of equations constitutes an endogenous switching model in the form of a multivariate regression model.898 households. 111 in 1992.the probability that a household owns a home. Then I solve for the parameters of OTHER from the other equations. Dummy variables indicating the number and the age of children living in the household are included in X. 410 report zero wealth holding. Previous research also indicates that a household’s marginal tax rate (MRT) has an eﬀect on its asset allocation decisions. Portfolio shares of the J + 1 assets and housing sum to one. HOUSE. and 106 in 1998 had zero wealth holding. 100 in 1995. Moreover. permanent income and wealth in determining the asset shares in household portfolios.7 I exclude those households from the sample and correct for sample selection. and include ACCOUNT. Thus. OTHER. the marital 7 93 households in 1989. VEHICLE. Portfolio choice theory has shown the importance of age. 24 . and RESTATE in the estimation of the model. RETIRE. Age and age-squared of the household head are included to capture a possible change in portfolio behavior related to the life cycle. 2. I drop one group of assets. The empirical model below investigates the eﬀect of children on both asset shares and homeownership decision. Of 13. STOCK. and the disturbance covariance matrix is singular. The other variables in X are chosen to be consistent with previous empirical studies.
status and the gender of the household head and willingness to undertake risky investments (RISKY) may also aﬀect the household’s asset allocation. All variables that enter X are also included in Xc and Xh , with two exceptions. First, the marginal tax rate aﬀects the tenure choice and homeowners’ expenditure on housing since homeowners can claim tax deductions for mortgage interest payments and property taxes. However, the marginal tax rate is not expected to aﬀect the housing expenditure of renters. Thus, marginal tax rate is not included in Xc . Second, willingness to undertake risky investment does not enter Xc because it has an eﬀect on the tenure choice regarding the investment motive but not on the expenditures on rental housing. In addition, the vector Xh includes the race of the household head. Table 2.6 presents the estimates of the probit model of equation (2.9). The estimates of the homeownership equation are consistent with previous studies. As a household’s permanent income rises, the probability of homeownership increases. Age of the household head increases the probability of ownership until age 74. The coeﬃcients for WHITE and MARRIED are significant and positive, indicating that at the sample mean, households with white heads are 10.2 percent more likely to own than households with non-white heads, and those that are married are 26.1 percent more likely to own than those that are not. The coeﬃcients on the variables showing the number of children are positive and signiﬁcant. Households with one child are 6.3 percent, and those with two children are 10.8 percent, more likely to own relative to households with no children. The probability of owning starts to decrease 25
after the second child, household with three or more children are only 9.6 percent more likely to own relative to households with no child. The probability of being a homeowner also increases with the household’s marginal tax rate, suggesting that the tax-deductibility of property taxes and mortgage interest is more valuable at a higher marginal tax rate. Tables 2.7- 2.10 show the coeﬃcients and the standard errors for each of the seven asset equations and the housing expenditure equation for homeowners. Permanent income has signiﬁcant but small marginal eﬀects on the structure of homeowners’ portfolio. The share of the portfolio allocated to RETIRE, HOUSE and VEHICLE increase with income, while the share allocated to ACCOUNT, STOCK and RESTATE decreases with income. Higher levels of wealth are associated with higher shares in ACCOUNT, STOCK, RESTATE, OTHER, and lower shares in HOUSE and VEHICLE. The marginal eﬀect of wealth on the share allocated to STOCKS, HOUSE and RESTATE is large. A 10 percent increase in assets would increase the share of the average portfolio allocated to STOCK by 0.62 percentage point. A similar increase in assets would induce 1.25 percentage point decrease in HOUSE and 0.66 percentage point increase in RESTATE. Age is an important determinant of portfolio shares in a homeowner’s portfolio, and the results in Table 2.7 and 2.8 reveal a quadratic relationship in terms of age. Portfolio shares for RETIRE, HOUSE and RESTATE increase with age, reaching a peak at the age of 50, 63 and 50, respectively. Portfolio shares for ACCOUNT and STOCK, however, decrease with age until the age of 26
50 and 43, respectively. This relation between age and portfolio shares suggests that the structure of a household’s portfolio changes when the household head reaches middle age. For example, households headed by persons above the age of 45 start substituting liquid assets for nonﬁnancial assets such as HOUSE and RESTATE. The coeﬃcients on the number and age of children suggest that the presence of children plays a signiﬁcant role on the portfolio structure of homeowners’. Several results are of particular interest. First, relative to households with no children, households with one child have a 5.6 percent higher portfolio share of HOUSE, controlling for age and permanent income. Similarly, households with two and three or more children have 8.9 and 9.2 percent greater portfolio shares in HOUSE. Second, the portfolio shares for ACCOUNT, RETIRE, and VEHICLE decrease with an increase in the number of children. Controlling for the number of children, households with all the children older than age 13 hold a smaller portfolio share in HOUSE and a greater share in VEHICLE and RESTATE. Finally, homeowners that are willing to undertake risky investments hold a greater share of risky ﬁnancial assets, such as STOCKS and RETIRE, and a smaller share of less risky assets, such as ACCOUNT and HOUSE. All other things held constant, the portfolio shares allocated to ACCOUNT and RESTATE have declined in 1998. Households have substituted STOCK, RETIRE and VEHICLE for the other asset categories since 1995. An increase in the marginal tax rates leads to an increase in the portfolio share allocated 27
RESTATE and OTHER.to HOUSE and VEHICLE. Compared to 1989. RESTATE and OTHER and a decrease in the share for ACCOUNT and VEHICLE. An increase in total assets leads to an increase in the share for STOCK. The quadratic relationship observed between the shares of assets in homeowners’ portfolio and the age of the head holds true for the ﬁnancial assets in a renter’s portfolio.7-2. The portfolio share for RETIRE increases with age until the age of 58. and a lower share for VEHICLE. RETIRE and RESTATE.10 present the estimates of the equations (2. renters have shifted toward RETIRE in their portfolio.10 report coeﬃcients of the selectivity variables. while the portfolio share for ACCOUNT and STOCK decreases until the age 40 and 43. The coeﬃcients on the selection terms in equations for ACCOUNT. respectively.11) for renters. should they choose to buy homes. The estimates of the Mills ratios for renters are signiﬁcantly diﬀerent from zero 28 . and the share for VEHICLE is signiﬁcantly higher for households with three or more children. STOCK. Since 1995. RETIRE and HOUSE for homeowners are all statistically signiﬁcant. the share for ACCOUNT decreases. It leads to a decrease in the share allocated to ACCOUNT. the 1998 portfolio share for RETIRE is 5.9 and 2. Tables 2. The eﬀect of children is less pronounced for renters than for homeowners. Tables 2. for example. Selfselection occurred in households’ tenure choice.0 percent higher in renters’ portfolio. More permanent income is associated with a higher share for ACCOUNT. For these assets. homeownership would not have the same eﬀect on renters. As renters have two or more children.
but the number of children has no eﬀect on renters’ expenditure.10 present the estimates of the housing expenditure equation.3 percent with the second child. Homeowners with one child have 11. The housing expenditure of homeowners increases 8. having more children increases the housing expenditures of homeowners by only 3. Table 2.11 presents the estimates of shares for assets that a typical homeowner holds. By a typical household. and RESTATE.for ACCOUNT. I mean a household headed by a white married. After the second child. RETIRE. the negative selectivity bias for renters’ implies the reverse: renters spend less on housing compared to average household of the sample had it chosen to rent. The last two columns in Tables 2. the expenditure on housing increases with the number of children. the signiﬁcance and the same sign of the selection terms indicate that self-selection occurred in a hierarchical sorting: the positive selectivity bias indicates that those who own a house spend less compared to average household had it chosen to own. all of the children in the household are younger 29 . This implies that other than in regards to these three assets.2 percent. On the other hand. For homeowners. The age of the children in the household has no eﬀect on the housing expenditure of renters nor homeowners. I use the estimated coeﬃcients and the variables of the model to calculate the portfolio share for each asset by the number of children and the age of the household head. For both renters and owners. there were no signiﬁcant diﬀerences in the average behavior of the two groups prior to home purchase.8 and 2.9 percent higher housing expenditure than homeowners with no child.
At all ages. this chapter investigates how the number and the age of children living in the household inﬂuence the portfolio composition of households. Using a 30 . HOUSE is the most important asset. As the household head reaches middle age. 1995 and 1998 SCF. As mentioned above. an increase in the number of children increases the probability that a household owns a home. The number of children has a negative eﬀect on the portfolio share for RETIRE.11 include both of these eﬀects. 1992. and its importance in the portfolio increase with the number of children living in the household. conditional on the tenure choice. more is invested in RETIRE.than age 13. The portfolio shares of assets calculated in Table 2. One contribution of this chapter is to study the eﬀect of the portfolio constraint imposed by the consumption demand for housing on the portfolio shares in housing and other assets. VEHICLE is the second most important asset in the portfolio when the household head is 30 years old. children change the demand for each asset. and the share allocated to RETIRE becomes the second largest in the portfolio. First.5 Conclusion Using the 1989. The household head is willing to take risky investments and holds mean wealth ($188. Second. The chapter examines the impact of children on the homeownership decision and the constraint of consumption demand for owner-occupied housing.160) and permanent income ($46. 2.690) and has a 15 percent marginal tax rate. children have two eﬀects on the portfolio structure of households.
switching regression model that takes into account the consumption demand for housing. An important implication of the ﬁndings of this chapter is that the constraint imposed by the consumption demand for housing decreases the share of portfolio allocated to retirement wealth as the number of children in a household increases. However. and the portfolio share for housing increases.S. the consumption demand for housing is higher than the investment demand. the ratio of housing to total assets increases as the number of children increases. The results show that the number of children living in the household has a signiﬁcant eﬀect on the tenure choice and on the housing demand of homeowners. As homeowners have more children. households are saving enough for retirement. the ratio of retirement accounts to total assets in renters’ portfolios does not signiﬁcantly decrease with the number of children. for households with children. the portfolio share for ﬁnancial assets such as interest-bearing accounts and retirement accounts decreases. One direction for further research is to include the liabilities and bor31 . Therefore. the chapter compares the determinants of portfolio allocation of homeowners to that of renters. Since households cannot separate the level of consumption of housing services from their investment in housing as an asset. This result suggests that. the policies that change the cost of housing and aﬀect ownership decision inﬂuence not only the portfolio share for owner-occupied housing but also the portfolio share for retirement assets. Considerable research has focused on whether U.
Most households ﬁnance their home purchases with mortgage debt.rowing constraints of households into the model of portfolio choice. 32 . The impact of children on the portfolio share for housing may be an important determinant of household mortgage debt.
807 0.97 48. permanent income and net worth.664 6.985 6.28 0.164 0.65 0.83 0.684 92.59 0. All variables are deﬁned in Appendix A.158 0.695 47. Notes: 1) Tabulations are weighted using sample weights.28 0.2.131 5.65 0.815 258.50 3.12 0.12 0.773 0.5 0.154 0.900 0. 2) All dollar values are reported in 1998 dollars.97 48.59 0.151 203.9 0.66 0.3 0.58 0.64 0.97 48.51 2. 33 . 1989-1998.75 0.11 0.97 Source: Survey of Consumer Finances.8 0.658 222.61 3.1: Descriptive Statistics by Year 1989 Income and Assets INCOME ASSETS (Mean) ASSETS (Median) MRT Eh Demographics AGE MARRIED FEMALE NCHILD CHAGE13 HOMEOWN RISKY Number of observations % with positive wealth 1992 1995 1998 47.14 0.660 12.750 0.Table 2.319 50.55 3.328 206.191 92.28 0.968 46.80 0.054 49.829 116.525 101.509 0. The text deﬁnes total assets.59 0.75 0.27 0.
and OTHER.072 Source: Survey of Consumer Finances.197 0. HOUSE. STOCK.415 0.105 0.043 0.067 0. 2) The text deﬁnes the assets called ACCOUNT. RETIRE. 1989-1998.Table 2.112 0.132 0.057 0.050 0.068 0.208 0. Notes: 1) Tabulations are weighted using sample weights.072 0.047 0.130 0.043 0.053 0. RESTATE.143 0. 34 .394 0.432 0.076 0. VEHICLE.059 0.186 0.196 0.410 0.059 0.076 0.2: Mean Asset Shares by Year 1989 Portfolio Shares ACCOUNT STOCK RETIRE HOUSE VEHICLE RESTATE OTHER 1992 1995 1998 0.094 0.
77 67.002 6.489 32.17 15.931 6. 1998 Eh 1998 dollars %HH %HO HO RR All households 100 66.29 68.847 15.475 5.587 95.69 3.741 7.24 86.042 6.28 9.72 78.50 51.03 21.08 22.55 6.26 21.803 8.43 9.391 Source: Survey of Consumer Finances.976 7.973 6.Table 2. 1998.46 72.54 5.09 64.78 7. 2) HH represents all households.677 6.263 5.49 36.29 4. 35 .081 6.93 1.22 64.555 93.378 $50-100K 29.748 Age Under 35 35-49 50-64 Above 65 Wealth Below $50K $50K-100K $100K-250K $250-1000K Above 1000K Children CHILD0 CHILD1 CHILD2 CHILD3 22.866 4.90 12.438 8. HO represents homeowners and RR represents renters.883 Above $100K 8.078 7.16 12.564 5.72 3.38 29.496 6.764 6.456 11.486 95.030 Income Below $15K 10.12 80. Notes: 1) Tabulations are weighted using sample weights.195 5.400 5.69 4.843 9.89 6.40 34.79 64.645 61.46 14.183 7.546 80.42 78.72 14.024 6.90 19.081 $30-50K 29.3: Expenditure on Housing.065 7.22 7.04 5.35 42.293 $15-30K 22.
453 0.183 0.064 0.065 0.097 0.091 0.039 0 0.068 0 0.086 0.091 0.073 $250-1000K 0.082 Above 1000K 0.071 0.270 0.135 0.190 0.055 0.046 0 0 0 0 0 0. 1998 ACCOUNT STOCK RETIRE HOUSE VEHICLE HO RR HO RR HO RR HO RR HO RR 0.091 0.212 0.042 $50K-100K 0. .199 0.064 0.061 0.049 0.077 0.445 0.017 0.047 0.019 0.107 0.072 0.162 0.413 0.281 0.128 0.374 0.158 0.485 0.4: Mean Asset Shares.018 0.050 0 0.078 0.165 0.055 0.062 Above 65 0.750 0.415 0.541 0.051 0.087 0.293 0.066 $50-100K 0.075 continued on the next page.011 0.047 0.166 0.454 0.251 0.071 0 0.389 0.256 0.359 0.579 0 0.025 0.101 0.143 0.090 $30-50K 0.062 0.028 0.010 0.122 0.054 0.043 0 0.295 0.052 0 0.213 0.080 0.007 0.157 0.062 Above $100K 0.221 0.490 0.149 0.047 0.226 0.086 0.112 0.112 0.056 0.049 0.192 0.162 0.127 0.083 0.021 0 0.093 $15-30K 0.069 0.730 0.080 0.049 0.028 0.132 0.014 0 0.238 0.401 0.068 0.129 Wealth Below $50K 0.149 0.059 0.041 0.040 0.032 0.111 0 0.559 0.260 0.147 0.020 0.234 0.074 0.102 0.181 0.078 0.535 0.022 0.608 0.090 0.002 0.587 0.061 0.172 0.088 0.Table 2.205 0.056 0.436 RESTATE HO RR 0.111 0.054 $100K-250K 0.031 0.089 0.287 0.015 0.047 0.092 0.252 0.489 0.089 0.048 50-64 0.022 0.135 0.122 0.137 0.027 0.645 0.075 Age Under 35 0.201 0.033 0.046 0.630 0.040 35-49 0.019 0.083 0.004 0.759 0.694 0.109 36 All households Income Below $15K 0.151 0.
STOCK. HOUSE. VEHICLE.087 0.026 0. 1998: Continued ACCOUNT STOCK RETIRE HOUSE VEHICLE HO RR HO RR HO RR HO RR HO RR RESTATE HO RR 0.122 0.195 0. The text deﬁnes the assets called ACCOUNT.471 0.074 0.087 0.038 0.288 0.040 0. 1998.653 0 0 0 0 0. 2) All dollar values are reported in 1998 dollars.044 0.038 0.019 0.061 0.495 0.055 0.117 0.048 0. RETIRE.044 0.222 0.062 0.089 0.200 0.088 0.069 0.5: Mean Asset Shares.040 0.373 0.098 0.110 0.577 0.045 0.032 0.512 Children CHILD0 CHILD1 CHILD2 CHILD3 37 Source: Survey of Consumer Finances.070 0.115 0.044 0.609 0. and RESTATE.560 0.085 0. Notes: 1) Tabulations are weighted using sample weights.102 0.Table 2. 3) HO represents homeowners and RR represents renters.052 0.049 0. .098 0.
193 0.014 -0.137 0.041 * -0.153 ** 0.044 ** 0.6: Results from Probit Estimation HOMEOWN Coeﬃcient Standard Errors Marginal Eﬀects -4.143 0.030 0.072 0.000 MTR RISKY WHITE YEAR92 YEAR95 YEAR98 Notes: 1) ** indicates signiﬁcance at 1 percent level.005 ** 0.404 0.034 ** 0.579.096 0.030 ** 0. and * indicates signiﬁcance at 5 percent level.102 -0.049 ** 0.261 0.052 ** 0.007 0.050 CONSTANT AGE AGE2 /100 MARRIED FEMALE CHILD1 CHILD2 CHILD3 CHAGE13 INCOME/10. 2) Variables are deﬁned in Appendix A.010 2. The number of observations N=13.080 0.341 0.210 0.040 -0.000 0.063 0.005 ** 0.118 0.040 ** -0.047 ** 0.137 ** 0.029 -0.304 0.108 0.Table 2.2.287 0.085 0.747 0.053 0.046 0.004 ** 0.052 0.042 ** 0. 38 .174 0.
024 0.008 0.003 0.021 0.004 0.056 0.013 0.307 0.054 ** AGE -0.001 ** MARRIED -0.007 0.007 -0.007 0.002 -0.000 0.019 0.021 0.039 VEHICLE Coef SE 0.005 -0.061 0.125 0.008 0.013 0.007 -0.002 0.005 0.010 0.021 0.7: Results: Asset Shares and Housing Expenditure of Homeowners ** ** ** ** ** ** ** ** 39 ** ** ** ** * * ** ** ** ** ** ** ** ** ** ** ** * ** ** ** * ** ** ** ** ** ** ** ** ** ** ** ** ** * ** ACCOUNT Coef SE CONSTANT 0.024 0.000 0.001 -0.006 -0.004 -0.005 0.005 0.007 ** CHAGE13 -0.010 0.001 -0.023 0.001 0.003 -0.006 ** FEMALE 0.007 -0.069 -0.001 0.006 L INCOME -0.006 -0.002 0.008 0.007 0.002 0.005 0.006 0.002 0.032 0.056 0.013 0.010 0.002 -0.009 0.023 0.049 HOUSE Coef SE 1.024 0.515 0.054 RETIRE Coef SE -0.029 0.018 ** RISKY -0.002 ** L ASSET 0.003 ** YEAR95 -0.001 -0.006 -0.006 0.027 0.059 0.027 0.001 * MTR -0.009 0.063 0.010 0.004 0.006 0.029 0.026 0.011 -0.020 0.092 0.006 * CHILD2 -0.002 -0.033 0.004 0.020 -0.004 0.012 0.002 -0.005 -0.011 0.087 0.031 * STOCK Coef SE -0.432 0.008 0.003 0.004 ** MR:home -0.009 0.010 ** * ** continued on the next page.008 0.007 0.016 0.008 0.006 0.006 ** CHILD3 -0.398 0.003 -0.004 0.455 0.003 -0.005 0.027 0.003 -0.062 0. .016 0.026 0.112 0.009 0.002 0.003 0.063 0.Table 2.022 0.004 0.198 0.067 0.049 0.005 CHILD1 -0.006 -0.021 0.012 0.003 -0.001 0.003 ** YEAR98 -0.003 -0.003 0.001 0.003 0.023 0.004 0.006 0.006 0.007 0.013 0.006 0.037 0.009 -0.007 0.004 0.010 0.001 0.003 0.001 0.031 0.002 0.001 0.006 -0.063 0.021 0.007 -0.009 0.001 0.190 0.089 0.005 0.003 ** YEAR92 -0.007 -0.001 ** AGE2 /100 0.020 -0.115 0.008 -0.077 0.020 0.005 0.008 0.018 ** MR:+ wealth -0.
005 ** MR:home -0.066 0.006 0.025 -0.002 -0.004 0.036 0.202 0.220 0.584 0.014 0.204 0.021 0.024 0.025 0.177 0.008 0.393 -0.024 0.004 -0.234 0.001 -0.025 MR: + wealth 0.2.015 -0.080 ** AGE 0.023 0. and OTHER.181 0.002 0.017 0.001 ** MARRIED -0.246 0.005 YEAR98 -0.010 0.052 0.000 0.005 YEAR92 0.004 -0.025 0.019 0.008 ** CHILD3 -0. RESTATE.002. The number of observations N=10.004 0.008 0. .119 0.004 -0.002 ** MTR -0.010 0.005 -0.007 0.018 -0.Table 2.116 0.043 0.007 * L INCOME -0.307 0.025 ** RISKY -0. VEHICLE.568 0.023 0.004 -0.008 CHILD2 -0.017 0.036 Notes: 1) ** indicates signiﬁcance at 1 percent level.158 0.003 -0.8: Homeowners: Continued ** ** ** ** ** ** ** ** ** 40 log Eh Coef SE * -0.005 * YEAR95 0.012 0.002 0.008 CHAGE13 0. STOCK.503 0.068 0.011 ** 0.001 0. HOUSE.005 -0. All variables are deﬁned in Appendix A.015 0.049 -0.003 0.001 0.001 0.053 OTHER Coef SE -0.120 ** ** ** ** ** RESTATE Coef SE CONSTANT -0.017 0.002 0.094 0.004 0.015 0.004 0.025 0.004 0.006 -0.010 0. MR represents Mills Ratio.001 0.001 0.018 0.003 0.007 ** * * 1.008 0.018 0.003 ** L ASSET 0.004 0. 2) The text deﬁnes the assets called ACCOUNT.032 0.189 0.009 FEMALE -0.002 0.002 ** 2 AGE /100 -0.009 ** CHILD1 -0.005 -0. RETIRE. and * indicates signiﬁcance at 5 percent level.
173 AGE -0.008 -0.019 ** CHILD3 -0.079 0.017 0.023 0.070 0.003 0.030 0.026 -0.003 ** AGE2 /100 0.048 -0.015 -0.9: Results: Asset Shares and Housing Expenditure of Renters ** ** ** ** ** ** ** * ** ** ** ** ** ** * ** ** ** 41 ACCOUNT Coef SE CONSTANT 0.015 0.039 STOCK Coef SE -0.016 0.031 0.054 0.243 -0.015 0.027 0.022 L INCOME 0.079 * RISKY 0.010 0.013 0.006 0.103 -0.077 0.319 0.013 * CHILD1 -0.007 0.012 0.006 -0.007 0.001 0.014 ** L ASSET -0.001 0.204 0.015 0.059 0.051 0.285 0.000 0.014 YEAR95 -0.020 0.080 0.033 0.005 0.001 -0.381 0.004 -0.002 ** MARRIED -0.019 0.053 ** continued on the next page.009 0.020 -0.059 0.052 0.002 ** 0.000 0.001 0.005 0.014 0.002 0.001 0.154 ** 0.061 0.015 -0.029 0.013 0.035 0.038 * MR:+ wealth 0.068 0.002 ** -0.039 0.019 0.022 0.109 0.004 0.007 0.015 0.Table 2.019 0.035 VEHICLE Coef SE 2.014 0.072 0.001 0.037 RETIRE Coef SE ** -0.011 -0.014 0.034 0.086 0.021 ** FEMALE 0.004 0.003 0.120 0.012 0.004 ** MTR 0.011 ** 0.010 0.014 ** 0.021 ** CHAGE13 -0.029 0.032 0.011 0.010 0.012 YEAR92 -0.027 0.008 0.019 0.011 0.026 -0.014 MR:home -0.017 CHILD2 -0.008 -0.064 ** 0.033 0. .243 0.010 0.023 0.028 0.008 0.097 -0.793 0.002 0.018 0.005 0.017 0.024 0.026 0.025 0.130 0.014 0.038 0.014 0.021 0.003 0.019 0.089 0.050 0.018 0.074 0.015 * YEAR98 0.017 0.019 -0.
001 0.067 0.024 MR: home 0.110 0.033 -0.018 0.189 0.002 * MARRIED 0.102 0.029 0.2.001 0.030 0.030 0.004 -0. VEHICLE.022 0.030 0.004 0.012 0.020 0.002 -0.014 0.042 0.011 0.008 RISKY 0.011 -0.365 -0.004 0.020 0.003 -0.033 ** MR: + wealth -0.002 2 AGE /100 -0.054 MTR -0.069 0.038 ** Notes: 1) ** indicates signiﬁcance at 1 percent level and * indicates signiﬁcance at 5 percent level.001 0.038 0. and OTHER.011 CHILD2 -0.125 -0.010 L INCOME 0.130 * AGE 0. STOCK.032 0.014 CHAGE13 -0.027 0.577.045 0.334 0.000 0.010 0.036 0.005 ** -0.011 0.062 0. 2) The text deﬁnes the assets called ACCOUNT.009 * YEAR95 -0.109 0.064 0.037 0.012 0.014 0.083 0. All variables are deﬁned in Appendix A.030 0.004 0. RETIRE. The number of observations N=3.173 0.022 0.038 0.006 ** ** RESTATE Coef SE CONSTANT -0.002 0.10: Renters: Continued ** ** 42 log Eh Coef SE 4.073 * ** ** ** OTHER Coef SE 0.005 0.014 0.020 -0. HOUSE.016 0.073 ** 0.020 0.017 0.017 0.285 -0. RESTATE.001 0.038 0. MR represents Mills Ratio.021 0.014 -0.014 -0.005 0.061 0.003 ** L ASSET -0.118 0.315 0.035 0.005 0.004 0.017 0.365 0.044 0.010 CHILD1 0. .010 * YEAR98 -0.001 0.003 -0.015 FEMALE -0.580 0.035 -0.009 YEAR92 -0.014 -0.Table 2.014 -0.012 CHILD3 -0.007 0.001 0.
061 0.594 0.Table 2.047 0.043 0.552 0.590 0.089 0.114 0. HOUSE.057 0.058 0.577 0.141 0.611 0.101 0.090 0.049 0.047 0.058 0.086 0.030 CHILD2 CHILD3 0.056 0.053 Notes: The text deﬁnes the assets called ACCOUNT.105 0.048 0.099 0.036 0.044 0.056 0.055 0.607 0.128 0.11: Portfolio Shares for Assets by the Number of Children and Age CHILD0 AGE=30 ACCOUNT STOCK RETIRE HOUSE VEHICLE RESTATE AGE=40 ACCOUNT STOCK RETIRE HOUSE VEHICLE RESTATE AGE=50 ACCOUNT STOCK RETIRE HOUSE VEHICLE RESTATE 0.132 0.043 CHILD1 0.036 0.111 0.064 0.094 0.070 0.650 0.079 0.033 0.037 0.642 0.093 0.112 0.626 0.100 0.096 0.043 0. RETIRE.617 0. 43 .534 0. and RESTATE.602 0.043 0.038 0.040 0.063 0.049 0.088 0.047 0.103 0.064 0.055 0.120 0.023 0. VEHICLE.102 0.049 0.053 0.095 0.054 0. STOCK.038 0.122 0.044 0.
Deaton  and Browning and Lusardi  give a list of empirical puzzles. however. these models are able to explain some of the empirical consumption puzzles. the standard life-cycle model suggests that households smooth consumption and spread resources across periods of high and low income. consumption proﬁles over age are hump-shaped. In many household-level data sets. Hubbard et al. Kimball . 44 . Yet. tracking the ageearnings proﬁle. empirical work on the strength of precautionary saving has provided mixed evidence. Carroll  shows that this kind of consumption proﬁle is consistent with a precautionary saving model in which individuals face uncertainty about their future earnings.  and Carroll .1 Introduction Many recent studies have recognized the role of precautionary motives on household saving behavior. Dynan  and Starr-McCluer  ﬁnd lit1 2 See Zeldes . As an extension to the traditional life-cycle model.1 Precautionary saving models predict that uncertainty about future income may cause households to reduce their current consumption in order to raise their stock of precautionary saving.Chapter 3 The Eﬀect of Precautionary Motives on Household Saving and Fertility 3.2 For example. Skinner .
and. ﬁnding an appropriate instrument. the bequest motive includes saving to leave assets to children. and incorporating the restrictions of the theoretical model. Yet the causal eﬀect might go in the opposite direction.  and Lusardi  ﬁnd more support for the precautionary motive. For example. given precautionary and other motives.  suggest that the mixed results might be due to the diﬃculties in empirically testing for precautionary saving.tle or no evidence for precautionary motive. whereas Carroll and Samwick . See Browning and Lusardi  and Carroll et al.3 One problem that has not been mentioned in the literature is that all of these empirical models try to explain the eﬀect of income uncertainty on household savings. precautionary motives. household income or the age of the head might aﬀect household saving and fertility simultaneously. It seems reasonable that these motives are aﬀected by the presence of children. This chapter takes account of the fact that children are endogenous along with the The problems include proxying certainty. Most of a household’s saving motives can be grouped into one of three categories: life-cycle motives. this chapter extends the empirical work on precautionary saving. the life-cycle motive includes saving for children’s education. ignoring the eﬀect of uncertainty on household composition. Browning and Lusardi  and Carroll et al. and bequest motives.  for the details. the precautionary motive includes saving to protect the well-being of children against income ﬂuctuations. fertility might be aﬀected by uncertainty or income ﬂuctuations. Furthermore. By examining the implications of uncertainty on the fertility decisions of households and incorporating fertility decisions into household saving decisions. 3 45 . ﬁnally. that is.
The second most frequent reason was saving for retirement. Table 3.7 and 4. saving for retirement peaking between age 51 and 60. This suggests that the relative importance of saving for each motive depends highly on the composition and the life-cycle stage of the household. respectively. saving for a home purchase peaking below age 31. namely. retirement. and saving for the education of children peaking between age 31-40.1 percent. More than 32 percent reported that ‘rainy days’ were an important motivation for saving. buying a home and education of childrenas the most important reasons for saving in the 1983 SCF (data come from the panel of 1983-89 SCF and is discussed at length in section 3.3). This chapter also addresses a neglected topic in the childbearing literature. with 18 percent. 46 .1 presents the proportion of households citing the following motives -‘rainy’ days. The proportion of households citing saving for children’s educational expenses and home purchase were 5. all of the four reasons reveal a hump shape: saving for ‘rainy days’ peaking in the 41-50 age group.  for a survey of life-cycle fertility models. the eﬀect of income uncertainty on fertility over the life-cycle. The most frequently reported reason for saving was to increase resources for ‘rainy days’ such as unemployment and unexpected needs. When disaggregated into age groups.saving behavior when estimating the eﬀect of children on savings. Most life-cycle fertility models incorporate some types of uncertainty.4 For example. Wolpin  estimates a dynamic stochastic model of fertility within 4 See Hotz et al.
In a study that addresses whether unemployment risk is an important factor in the timing of the purchase decision of durable goods. however. and transitory shocks to the wife’s wage. Yet the prediction of the precautionary view of savings is not validated: income uncertainty actually reduces savings of households with either high or low wealth holdings. Using the data from the panel of 1983-89 SCF. Dunn  ﬁnds consumers respond to increases in the unemployment risk by postponing purchases of a home or a vehicle. there is evidence that income uncertainty has a direct eﬀect on fertility and family size. the time path of the husband’s income. 6 Becker  suggests that children can be viewed as durable goods yielding psychic income to the parents.) 5 47 . This chapter also examines whether having a child has an eﬀect on Wolpin  presents a model in which income is stochastic but his model also assumes that households have quadratic utility.an environment where infant survival is uncertain.6 This chapter examines whether income uncertainty is associated with lower fertility and higher savings. However. The ﬁnding is consistent with previous studies that found little or no eﬀect of precautionary motive on savings. Thus. and does not aﬀect savings of the rest of the population. even after controlling for the fact that saving is endogenous to the fertility behavior.5 Hotz and Miller  integrate the life cycle fertility and labor supply. treating children as a durable good the demand for which is found to respond to increases in unemployment risk (like other durable goods in Dunn. None of these studies. this chapter can be viewed as a combination of those two prior works. and thus the variance of income does not appear in the decision function. have speciﬁcally analyzed whether uncertainty about earnings is a signiﬁcant factor on the choice of whether or not to have a child. I ﬁnd that households with higher income uncertainty are less likely to have a child. and consider a number of uncertainties such as the outcome of the contraceptive eﬀort.
household savings. The results show that having a child appears to reduce savings of households with young heads and to increase savings of those with middle-aged heads. The remainder of this chapter is organized as follows. Section 3.2 examines both the theoretical and the empirical model. Section 3.3 describes the data set and the variables used in the empirical work. The empirical results are reported in Section 3.4, and a summary of the ﬁndings with conclusions are provided in Section 3.5.
The Relationship between Fertility and Saving
Households are assumed to maximize a lifetime utility function that is
additively separable over time. The utility of household i at age t depends on the number of children, Mit , and a composite consumption good, Cit :
β t U (Mit , Cit )
where β is the discount factor and T is the time of death. The household faces two decisions at each period: whether to have a child, and how much to consume. If parents give birth to a child at age t, then ∆CHILDit = 1, and = 0 otherwise. The number of children at age t, Mit , is the sum of all births until age t. The household is able to borrow and lend across time periods at a real interest rate. Savings at age t, Sit , depend on the household income, the cost of consumption good, and the cost of children. The household income is assumed 48
to be stochastic. Thus the household faces uncertainty about future income. Depending on the utility function, income uncertainty can aﬀect the fertility and consumption decisions of the household. This utility maximization problem, in general, is intractable and does not deliver closed-form solutions without imposing structural assumptions concerning the utility function. This makes deriving testable implications impossible, even for a two-period model. The construction of the model, however, shows how fertility and saving decisions can be determined simultaneously. The lack of testable implications from the theoretical model allows me to examine a general form of saving and fertility behavior. For the empirical speciﬁcation, I assume that the level of savings of a household i at time t, (Sit ), is a linear function of the variability of the household’s income (Φit ), birth of
s a child (∆CHILDit ), and a set of observable variables (Xit ) that measure s the life-cycle stage of the household. The matrix Xit includes the number of
children living in the household, permanent and transitory income and other household demographics. Permanent income is deﬁned as the expected income for year t conditional on the demographics of the household, and transitory income is deﬁned as the diﬀerence between realized and expected income for year t. Savings of a household i at time t can be thus represented as:
s Sit = γ0 + Φit γ1 + ∆CHILDit γ2 + Xit γ3 + u1it
where γ0 , γ1 , γ2 and γ3 are the parameters to be estimated, and u1it is an error term representing unobservable variables. 49
The precautionary saving model predicts that saving is increased by a combination of a positive third derivative of the utility function and uncertainty about the future income. Therefore, a positive value for γ1 is implied by a utility function with a positive third derivative (as with constant absolute risk aversion (CARA) or constant relative risk aversion (CRRA) utility functions). For a quadratic utility function (for which the third derivative is zero), saving behavior does not respond to income variability, and in this case, γ1 should be zero. The life-cycle model suggests that a household that gives birth to a child at time t saves less (due to an increase in necessary consumption). Households with younger heads may save even less with an additional child because their current (expected) income is less than the annuity value of their lifetime income, and the diﬀerence between their income and expenditure is even greater. Such a model suggests γ2 should be negative, and the coeﬃcient of the interaction of ∆CHILDit with the age of the household head should be positive. The childbearing decision of a fecund household is speciﬁed as a function of Φit and a set of household speciﬁc variables that aﬀect the preferences
c for a child, Xit . A household is considered to be fecund if the wife is younger
than age 49 or if the head of the household is a female younger than age 49. The decision to have an additional child is represented as
c ∗ ∆CHILDit = η0 + Φit η1 + Xit η2 + u2it
then they should also reduce their ‘consumption’ of children. and η1 should be negative. Then I estimate the equation (3. liabilities. This implies that households with higher income variability are less likely to have a child.where ∗ ∆CHILDit = 1 if ∆CHILDit > 0 = 0 otherwise. The 1983 SCF interviewed a 51 . If consumers react to increases in uncertainty by cutting down their consumption. I restrict the sample to the fecund population and get an estimate γ2 of γ2 by using the ˆ probit ML method for the equation (3. where η0 . as suggested by the precautionary saving model. The model is estimated using a two- stage estimation procedure described in Maddala .2) by OLS for all of the sample after substituting γ2 for γ2 for the fecund population ˆ and 0 for the other households. and u2it is an error term representing unobservable variables.3 Data The data set used for estimation is the 1983 and 1989 panel of the SCF. 3. This data set contains detailed information on household assets. η1 and η2 are parameters to be estimated. Note that the model is identiﬁed even if u1it and u2it are not independent s c and Xit includes all the variables in Xit .3). income and characteristics in 1983 and 1989. Maddala  shows that the resulting estimates of the coeﬃcients are consistent. First.
Net worth (NWORTH) is the total value of household’s assets minus its total liabilities. which will be called SAVE1. and 361 of them were reinterviewed in 1989. trusts. call accounts. 497 of them were reinterviewed in 1989. cash value of life insurance and the later includes residential property. saving accounts. Total assets is the sum of ﬁnancial assets and nonﬁnancial assets. Total liabilities include mortgage debt. See Kennickell and Starr-McCluer  for a general description of the 1983-89 panel. The ﬁrst saving measure. vehicles and other real assets like art and precious metals. 103 households and 1. money market deposit accounts.7 Household saving is derived as a ﬁrst diﬀerence in net worth between 1983-89. automobile loans. The 1989 SCF also asked households to report major changes in asset holdings since 1983. certiﬁcates of deposit and saving accounts). includes capital gains.sample of 4. substantial inconsistencies are observed between reported net investments in assets and measured changes in holdings. 7 52 . which makes it diﬃcult to distinguish between active and passive saving. The 1983 SCF consists of a dual sample. In addition to a standard multi-stage area probability sample. loans. business equity. credit card debt. mutual funds. and this amount is divided by six to get the annual household saving. balances outstanding on lines of credit and loans on consumer durables. other loans for property. stocks. However. This information could be used to exclude both realized and unrealized capital gains. An oversample of 438 high-income households came from this list in 1983. other real estate. a list sample was drawn from tax information provided by International Revenue Service. individual retirement accounts. where the ﬁrst includes liquid assets (checking assets. home equity. Keogh accounts. bonds.
before taxes and other deductions were made?’ Income of the households for 1983. 103 households in the 1983 SCF. I regress log income on age. I adjusted SAVE1 as follows to obtain a measure called SAVE2: whenever a household did not buy or sell a house that was the family’s primary residence. I deﬁne two measures of income uncertainty. 8 9 Income uncertainty at- Of the 4. The income measure comes from the question. 822 were reinterviewed in 1986 using a shorter questionnaire. ‘In [the preceding calendar year] how much was the total income you (and your family living here) received from all sources. To exclude the capital gains. dummies representing asset holdings in 1983. 1987 and 1988 are drawn from the 1983-1989 panel. The ﬁrst measure assumes that households have knowledge about their future income and expect their income to change over time as household characteristics change.The inconsistency seems to be lower for home purchases (Kennickell and StarrMcCluer ). All values are converted to 1989 dollars using the Consumer Price Index Research Series Using Current Methods(CPI-U-RS). 1984. household demographic variables and age-interaction terms. and 1985 are drawn from the 1986 wave of SCF which was conducted with a large subset of 1983 respondents using a shorter questionnaire.8 Income values for 1982. Using the panel dimension of income observations in the data. year dummies. To remove the predictable component of income growth. 1986. 9 The income measure includes both capital and non-capital income. The precautionary saving model predicts that income risk regarding capital income might have a diﬀerent eﬀect 53 . I kept the value of the primary residence constant. education. 2.
using instrumental variable estimators is not useful when the ﬁrst stage instruments are poor. which is not reported in this chapter.10 Household permanent income (PERINC) is deﬁned as the mean of predicted income over the seven year period. 11 Another income variability measure. is the coefﬁcient of variation of log income. Not excluding such expected changes biases this VLI measure of uncertainty upward. The second measure of uncertainty is the variance of log income for the 1982-89 period (VLI). variability measures like VLI and VRLI might be poor proxies for uncertainty. households probably expect their income to change over time and know when some of these changes will happen. VRLI may suﬀer from the same deﬁcit if income change is due to a factor that the household has information about but is not controlled for in the income regression. As pointed out in Lusardi  and Browning and Lusardi . The empirical results hold true for this measure too. The mean of the reported income over the 1982-88 period (MEANINC) is also used as another measure of income. ﬁnding an appropriate instrument on household saving behavior than that of earnings. In addition. However. Dummies representing the amount of assets that households hold by 1983 are included in the regression to control for this eﬀect. I control for the employment status of the spouses and female heads in the earnings regression. this information is only available for 1983. 10 Female labor supply decisions are correlated with household fertility decisions. Unfortunately.11 This measure assumes households have no information to forecast future income aside from their current income. Therefore.tributed to each household is equal to the variance of residual log income (VRLI) for the 1982-88 period. 54 . while transitory income (TRANSINC) is the mean of residuals from the earnings equation. However. 1986 and 1989. Most studies use instrumental variables for the uncertainty proxy using information on occupation. education and industry.
12 55 . The ﬁnal sample consists of 1.13 Table 3. separation or the death of either head or spouse are excluded. divorce. households that experienced a change in composition such as marriage. 000 is somewhat arbitrary. In the panel 1983-89 SCF.. Of the remaining 1. this exclusion or a similar one is necessary when working with means which are aﬀected by outliers. I also exclude those households with net worth greater than $10 million in 1983 or 1989 or for whom the absolute value of the change in net worth per year is more than $600. I use VRL and VRLI without an instrumental variable estimator. 035 households with the heads between the age of 22 and 88 in 1983. Therefore. However.) This eliminates the income variability or net worth change caused by family separation or family creation. The variable ∆CHILD indiThe cut-oﬀ net worth of $10 million and saving of $600. those households with more than three missing or non-positive income values are dropped.1.180 households. 84 were dropped because of outlying net worth or saving values and 66 were dropped because of missing income values. The sample selection criteria for the sample are as follows. All variables are described in detail in Appendix B. 000. See Kennickell and Starr-McCluer  for details. 13 The sample design in 1983 speciﬁcally excluded households with the heads under the age of 22. A household is only included in the analysis if it remained intact between 1983 and 1989 (i.2 illustrates the composition of the sample in detail. 299 households out of 1.479 experienced a major change in family composition and were dropped from the sample.to exclude for identiﬁcation is problematic.e.12 To calculate an accurate measure of income uncertainty.
2 provides the variable means by household fertility of the fecund households.1 percent).6 percent of the fecund households had a child between 1983 and 1989.are plausible: households with an additional child are younger. Columns (1) and (2) provide the variable means and standard deviations of all of the households in the sample and the fecund households. have higher expected income and have a higher number of young (0-6 years old) children in 1983.with and without an additional child . and saved more compared to the other households in the sample. Therefore.e. Among fecund households. which is $37. Fecund households are headed by younger persons. i.3 percent of the families experienced more than one birth during that time period-2.14 I refer to the households that had a child as households with an additional child. respectively. I use a probit model and a dummy variable to indicate the fertility choice instead of using a count data model. Also.0 percent had three. had less net worth in 1983. According to the SCF data.3 percent had two children and 1. fecund households are faced with higher income uncertainty than the rest of the sample. Most of the diﬀerences in net worth and saving between the two groups can be attributed to the fact that these two groups are at diﬀerent stages of their life cycles. The average net worth for households with an additional child is $82. ∆CHILD = 1 if the household experienced at least one birth of a child.cates the fertility of the household between 1983 and 1989. 18. 14 56 .179 less than the mean net worth of the rest of the fecund houseOnly 3.611 in 1983.. but had higher income between 1983 and 1989. Columns (3) and (4) of Table 3. mostly married (89. comparisons across the two groups of households .
According to SAVE1 and SAVE2.8 percent in 1989. the bottom 25 percent of the distribution faces a lower income variability than the households in the 25-50 percent of 57 . 000. 000 and above $60. The remarkable diﬀerence in the housing tenure choice of the two groups shows the link between the decisions of having a child and purchasing a house. 462. we observe that households who had a child are faced with lower income uncertainty (0. respectively. On the other hand. when we compare the income uncertainty of the two groups. the increase is insigniﬁcant. The same argument is true for net worth and SAVE2: households in the bottom 25 and top 10 percent of the net worth distribution in 1983 have the highest income variability. Uncertainty estimates are greater for households with mean income below $10.7 percent in 1983 and rose to 77. Households in the bottom 25 and top 10 percent of the SAVE2 distribution face higher income variability than the rest of sample. from 67.191). 690. Also. 170 and $8.holds. households with an additional child saved more than the rest of the fecund sample. while fecund households without an additional child saved $7.5 in 1989.132 versus 0. This suggests that households at the tails of the income distribution face higher uncertainty. 648 and $6.0 percent in 1983 to 72.3. they saved $11. The homeownership proportion for the rest of the fecund sample is higher in 1983 but compared to the households with an additional child. The measures of income uncertainty by household characteristics are given in Table 3. The homeownership proportion among households with an additional child was 53. When households are grouped by SAVE1.
58 .the SAVE1 distribution.4 Estimation and Results Table 3. When grouped according to the number of children. and 1 percent among the age 40 and above group. For other SAVE1 groups. 0 otherwise. households with young and middle age heads that had a child face lower income variability. for whom it reaches its highest value. 3. income and income uncertainty by childbearing decisions and the age of the household head. The dependent variable is ∆CHILD = 1 if the household had a child between 1983-89. Households who had a child between 1983-89 are diﬀerent from other households in terms of their saving. and their permanent income is higher.4 represents household saving. income and income variability. Table 3. Households that had a child save more. the estimates of income uncertainty decrease as the number of children living in household in 1983 increases. regardless of how savings were measured. The right-hand variables include factors that are expected to aﬀect the demand for a child. Diﬀerence between the savings of households with and without an additional child increase as the age of the household head increases. Almost 36 percent of the households with heads below age 31 in 1983 had a child during the following six year period. versus 16 percent of the households with heads between age 31-40. Considering the income uncertainty. regardless of the uncertainty measure.5 shows the results of the probit analysis of the fertility de- cision of the fecund sample. income uncertainty is lower except the top 10 percent of the distribution.
5 and 0. middle (MIDDCH) and older (HIGHSCH) children in 1983 and the interaction terms for age (AGE83×HOWN83 and AGE×YOUNGCH). The results in table 3. homeownership in 1983 (HOWN83). indicating that being one year older reduces the probability of having another child by 1 percent.namely.1 increase in VRLI and VRL decreases the probability of having a child by 0. marital status (MARRIED). The analysis in column (1) uses VRLI as the income uncertainty measure and permanent and transitory income as the income measures. a dummy indicating whether spouse works full time at paid employment in 1983 (SPFULLT). a 0. column (3) uses VRLI and mean income. an income risk measure (VRLI and VLI).6 percent. The signs of the age interaction terms imply that older homeowners are less likely to have a child.5 show that other things being equal. The coeﬃcient of age is highly signiﬁcant and negative. A married household is 8 to 10 percent more 59 . number of adults living in the household (NADULT). The probability of having another child is lower for a household that has a full-time working spouse or that is headed by a white person. Evaluated at the sample mean values. a household income measure (MEANINC. respectively. whereas older households with small children are more likely to experience another birth. number of young (YOUNGCH). race of the household head (WHITE). column (2) uses VLI and mean income and ﬁnally. PERMINC and TRANSINC). age (AGE). the probability of having another child declines with income variability (regardless of the measure) and the number of children in each age group living in the household.
a measure of income uncertainty (VRLI and VRL).6 and 3. age of the head (AGE). the number of adults and children living in the household (NADULT and NCHILD). The predicted probability of having a child.7 for SAVE1 and SAVE2. However. the behavior of the wealthy and the not wealthy are diﬀerent than the rest of the population. income (PERMINC.likely to have another child. a self-described expectation to leave a bequest (BEQUEST83). the probability of having a child seems to increase with income. transitory income in column (1) has a negative eﬀect and mean income in column (3) is insigniﬁcant. both permanent income and mean income in columns (1) and (2) are signiﬁcant. is included as a right-hand variable with other factors that might aﬀect the saving behavior. Finally. compared to households headed by an unmarried person. Similarly. The top 10 percent and bottom 25 percent net worth holdings in 1983 are included to address the saving behavior of the wealthy and the not wealthy. the change in the number of adults between 1983-1989 (∆NADULT).6 and 3. age interaction terms (AGE×NCHILD and age×∆CHILD) and income uncertainty interaction terms (VRLI (VRL)×NWORTH25 and VRLI (VRL)×NWORTH90).7 use the same income and uncertainty measures as columns (1)-(3) in table 3.5. a dummy indicating having 1983 net worth in the top 10 percent and bottom 25 percent (NWORTH90 and NWORTH25). ∆CHILD. Columns (1)-(3) in tables 3. TRANSINC and MEANINC). namely. Estimates of the saving equations are presented in tables 3. 60 . in terms of the eﬀect of uncertainty. the income uncertainty interaction terms show whether or not .
and it is signiﬁcantly lower than the estimated propensity to save out of permanent income.4126.96.36.199 do not the support the idea that households save a higher fraction of transitory income.162 save about $15. the results in Table 3.The results for two measures of savings are quite similar (SAVE1 in Table 3. The estimated coeﬃcient of the propensity to save out of transitory income is 0. around $7.500 less than the rest of the population as a result of an increase in income uncertainty.24 in column (1) of Table 3. Having 1983 net worth in the top 10 percent is associated with higher levels of SAVE1 and SAVE2 in all speciﬁcations. Income uncertainty reduces savings of the households in the top 10 percent and bottom 25 percent of the wealth distribution and does not aﬀect the rest of the population. Before we examine the eﬀect of children on savings.500 less than the rest of the population whereas households in the bottom 25 percent of the wealth distribution save $3.6 show that households in the top 10 percent of the wealth distribution and with VRLI of 0.132-$8.000 more than the rest of the sample. which is 0.6 and Table 3. However. The results in Table 3. Both SAVE1 and SAVE2 reduce with the number of adults living in the household.7). For example. respectively.34. Changes in the number of adults between 1983 61 . regardless of the measure. evaluated at the sample average of VRLI. Saving also increases with income. households in the top 10 percent of the wealth distribution save almost $11.6 and SAVE 2 in Table 3. let us look at the eﬀect of the number of adults living in the household. which is 0.
This result highlights the importance of the interaction between household composition and the age of the household head.7. age does not aﬀect the savings behavior of those without children. That is another impact of children on household savings.796 more) than household that do not expect to leave a bequest. For this.6 and 3.555-$12. Controlling for the number of children already living in the household. Also. the sample is restricted to only fecund households. The overall eﬀect of having an additional child on household savings depends on the age of the head: households with heads younger than age 29 save less compared to households with heads age 29 and older. households expecting to leave a bequest save signiﬁcantly more (around $12.and 1989. however being one year older and having an additional child increases savings. we observe that the eﬀects of the children and age interaction terms decrease but do not disappear. Households with children save less when the household head is below age 35 and save more above that age. When we control for permanent income as in column (1) of Tables 3. do not aﬀect SAVE1 but appear to reduce SAVE2. and the fertility decision is modeled as an endoge- 62 . however. The same is true for the number of children living in the household. Having an additional child reduces savings. This chapter also estimates average savings of households who did not have a child between 1983-89 and compares it with what they would have saved if they had chosen to have a child.
Income uncertainty actually decreases savings of the households with high or low wealth holdings and does not aﬀect the saving behavior of the rest of the population. depends on the age of the household head.nous switching model. even after controlling for several demographic characteristics. I take into account the fact that fertility decisions are endogenous to household saving decisions.15 The results are given in Table 3. This ﬁnding suggests that the overall eﬀect of children on household saving is negative. The empirical results suggest that income uncertainty directly aﬀects the probability of having a child. 63 .6.066 less if they had chosen to have a child. 3.5 Conclusion This chapter estimates the eﬀect of the precautionary motive on house- hold fertility and savings by relating income uncertainty to the changes in the number of children and household net worth.133 according to the results of the three regressions in Tables 3.695-13. In estimating this eﬀect. Overall. The results show that households would have saved around $2.8. The direction of the response. Finally.297-4. average SAVE1 of the households that did not have a child is around $12. changes in the number of children and children already living in the household reveal a signiﬁcant eﬀect on household savings. however. implying that younger households save less whereas older 15 See Maddala  for the models with self-selectivity.
At the same time. The main ﬁnding of this chapter is consistent with the life-cycle theory of saving and consumption. 64 . the ﬁndings are not consistent with the predictions of the precautionary saving model that agents faced with uncertainty about future income increase their savings. After controlling for the number of children living in the household and the expectation of leaving a bequest. Household composition is an important factor of life-cycle savings. the age eﬀect on savings disappears.households save more with an increase in the number of children.
Observations are weighted to reﬂect the U.052 0.289 0.192 0.Table 3. retirement.047 0. population as a whole.1: Saving Motives by Age Groups.362 0.230 0. 1983 All By Age Below 31 31-40 41-50 51-60 61-70 70 and over Rainy Days Retirement Home 0. buying home and education of children respectively.176 0.004 0.122 0.273 0.S.065 0.011 0.057 0.017 0. 65 .010 0.047 0.383 0.016 0. 1983-1989.000 0.323 0.117 0.000 Source: Survey of Consumer Finances.111 0. Number of observations: 1035.326 0.345 0.250 0. Notes: The table reports the proportion of households citing the selected motives as the most important reason for saving as ‘rainy days’.041 Children 0.206 0.
767 1.7 0.1 0.778 0.135 0.845 0.112 2.670 0.Table 3. 66 .189 38.191 0.672 0.795 0.891 0.407 0.001 0.537 0.490 0.6 13.645 0.055 0.197 ∆CHILD = 1 11170 8690 38852 41210 82611 30.297 0. All dollar values are in 1989 dollars.725 0.556 0.092 2.652 0.372 0.487 0.246 0.791 1. All variables are described in Appendix B.132 0.734 0.2: Descriptive Statistics by Household Fertility Decision SAVE1 SAVE2 MEANINC PERMINC NWORTH AGE EDUC WHITE MARRIED NCHILD YOUNGCH MIDDCH HIGHSCH ∆CHILD NADULT BEQUEST HOWN83 HOWN89 VRLI VLI All HH 7699 6080 37668 36339 140628 45.460 0.4 13.537 0.516 2.9 0.169 Fecund HH ∆CHILD = 0 8282 7648 6868 6462 43109 44122 40171 39921 112861 119790 36.1.456 0.437 0.624 0.424 0.725 0.302 0.289 0.8 12. The table reports means of the variables.151 N 1035 509 422 87 Note: ∆CHILD=1 if the household had a child between 1983 and 1989 (0 otherwise). Observations are weighted using the sample weights.120 0.186 2.780 0.1 12.4 0.180 0.334 0.788 0.162 0.747 0.938 0.
Table 3.0 0.2371) $1.5245) 0.078)-1.1284 (0.1912 0.5066) 1 Child 17.2973) Note: Standard deviations are given in parentheses.265-52.0 0.1462 (0.3230) $127.0 0.0 0.000 12.0902 (0.232 25.818 15. VRLI is the variance of residual log income.5537) $ 1.7517 25.2391 (0. Observations are weighted using the sample weights (N=1305).2738) (0.0977 (0.6357) (0.1996) (0.1808) (0.2299 0.1312 (0.1889 (0.1715 (0.3333) (0.725 25. and VLI is the variance of log income.2374 (0.446 15.2210) (0.1468 0.492 15.2086) Above $314.1832 (0. All variables are deﬁned in Appendix B.1184 0.6786) (0.000-29.1.3279) SAVE1 Below (-$1.433) 0.2171) 2 and more 27.1194 (0.057-30.0 0.1027 0.1 0.489 25.726.2013 0.1716 (0.233-12.2449) (0.490-7.4780) $ 10. 67 .1707 (0.5512) SAVE2 Below (-$739) 25.7 0.9087) NWORTH Below $10.492 10.000 14.2579) $7.0 0.1436 0.2 0.1451 0.10.078) 25.4940) (0.125 25.3334) $52.5836) (0.1095 0.3524) (0.518-314.818 10.0 0.0 0.4963) 0.0 0.3362 0.0 0.1803 0.2713 (0.126-24.2657) Above $60.2920 0.2274) (-$1.0 0.7 0.2269) (0.1056 0.0 0.2134 0.0 0.446 10.3376) VLI 0.0998 0.0 0.1269 (0.2290 0.0 0.265 25.6504) $10.1363 (0.999 36.4881) (0.2117 (0.1296 (0.1527 (0.3234 (0.169 (0.056 25.4472) (0.2281 (0.4232) $10.2330 (0.3: Mean Income Uncertainty by Household Demographics % HH VRLI All 100 0.0988 (0.3980) Above $24.1794) Above $30.6129) (-$739)-1.1559 0.2 0.2642) $30.1330 0.4092) (0.2825) (0.1479 (0.000-59.1855 (0.999 37.162 (0.5530) NCHILD No Children 55.2740) (0.1 0.2458) 0.0 0.1088 (0.9431) (0.426) MEANINC Below $10.
884 36.9 11.812 6. Income and Income Uncertainty by Age and Fertility AGE Below 31 ∆CHILD 0 1 31-40 0 1 41 and above 0 1 %HH SAVE1 SAVE2 PERMINC VLRI 12.390 52.619 3. and VLI is the variance of log income.487 0. All variables are deﬁned in Appendix B.1408 0.5 4.3 8.272 9.8 10.2376 VLI 0.1839 0.528 4.4: Savings.3064 0.1.899 0.2261 Note: ∆CHILD=1 if household had a child between 1983-1989 (0 otherwise).1727 3.0812 0.1369 0.1507 20.220 34. 68 .422 0.628 0.912 0.331 23.0841 56.769 0.Table 3.5 24.1 4. VRLI is the variance of residual log income.1774 0.636 27.257 43.477 40.2920 6.049 5.
186** [-.0426] -0.131 0.175** 0.166** 0.130** 0.077 0.545 0.3338] [-0.130** 0.0612] [0.0094] [-.225** [-.749** -0.068 YOUNGCH -1.001 1.14 0.225** 0. Number of observations N=509.006 TRANSINC/1000 -0.886** 0.130 0.236 [-0.627** 0.0675] -0.154** 0.203** (1) Coef StdE 1.208** 0.20 Pseudo R2 0.0550] [-0.154** 0.0786] [-0.0829] [-0. YAGE is YOUNGCH×AGE.0099] [-.564 HOWN83 2.409 0.Table 3.418 0.001* [ 0.0095] [-.001 1.1040] [-0.392** 0. and * indicates signiﬁcance at 10 percent level.175** 0.5: Probit: Fertility Decision of Fecund Households (2) Coef StdE 1.0613] 0.019** 0.0553] [-0.178** 0.31 0.623** 0.0541] -0. .1038] [-0.020** [-.062 -160.998 -0.3340] [-0.397 0.047 -0.1037] [-0.00 0.717* -0.369 -0.228 WHITE -0.0787] [-0.368 -0.0001] [ 0.134 0.060 -2.543 0.357 0.0001] [ 0.35 0.019** 0.720* -0.132** 0. and HAGE is HOWN83×AGE.027** 0.1297] [ 0.001** 0.060 -160.566 [-0.024** Note: Coef reports coeﬃcients and StdE reports standard errors.073 SPFULLT -0.060 [-0.0577] (3) Coef StdE 1.953** 0.1041] [-0.331 HIGHSCH -0.0845] [-0.0625] -0.063 0.0844] [-0.001 MEANINC/1000 MARRIED 1.232 HAGE -0.0008] [-.020** -0.420 YAGE 0.768 0.714 NADULTS 0.31 0.024** 0.389 0.2375] -2.049 Likelihood -152. Marginal eﬀects are given in the brackets.980 -0.448 0.000 0.000* 0.366 -0.384** 0.229 -0.047 [-0.369 [-0.627** 0.565 1.385** 0.021** -0.0594] 69 CONSTANT AGE VLRI VLI PERMINC/1000 0.886** 0.0920] 1.208** 0.063 0.410 0.024** 0. ** indicates signiﬁcance at 5 percent level.844 MIDDCH -0.
22 257 53 -7244 3908 -24818 11791 707 319 12952 5786 -7845 5112 . ** indicates signiﬁcance at 5 percent level.6: Regressions of SAVE1 on Income Uncertainty with Endogenous Fertility Decision (1) Coef StdE 19212 19254 2250 2252 343 3520 26829 12463 ** -21824 6015 ** -71146 29321 ** 2180 2441 -500 3222 36903 11508 ** -464 3230 37290 11447 ** -22195 5914 ** -71517 28439 ** (2) Coef StdE 15228 19373 (3) Coef StdE 15240 19296 2258 2365 70 -208 294 -134139 93086 4256 3304 343 102 ** 240 59 ** -7554 3838 ** -22542 11934 * 646 320 ** 12654 5751 ** -7664 5177 .22 ** ** ** ** ** Note: Coef reports coeﬃcients and StdE reports standard errors.22 -21218 5702 ** -63955 26900 ** -131 306 -131 305 -185235 83042 ** -186203 83131 ** 6412 2952 ** 6474 2950 ** CONSTANT VRLI VRL NWORTH25 NWORTH90 VRLI× NWORTH25 VRLI× NWORTH90 VLI× NWORHT25 VLI× NWORHT90 AGE ∆CHILD AGE ×∆CHILD PERMINC TRANSINC/1000 MEANINC/1000 NADULTS NCHILD AGE× NCHILD BEQUEST83 ∆ NADULT R2 255 53 ** -7132 3916 ** -24479 11818 ** 698 319 ** 12916 5780 ** -7860 5120 * .Table 3. and * indicates signiﬁcance at 10 percent level. Number of observations=1. .035.
18 Note: Coef reports coeﬃcients and StdE reports standard errors.18 -19347 5780 ** -53719 26977 ** -161 306 -160 305 -175653 82756 ** -177076 82940 ** 6075 2966 ** 6149 2969 ** ** ** ** ** * CONSTANT VRLI VRL NWORTH25 NWORTH90 VRLI× NWORTH25 VRLI× NWORTH90 VLI× NWORTH25 VLI× NWORTH90 AGE ∆CHILD AGE×∆CHILD PERMINC/1000 TRANSINC/1000 MEANINC/1000 NADULT NCHILD AGE× NCHILD BEQUEST83 ∆NADULT R2 221 56 ** -8168 3935 ** -23842 11737 ** 679 320 ** 11712 5766 ** -10090 5329 * . ** indicates signiﬁcance at 5 percent level. and * indicates signiﬁcance at 10 percent level. . Number of observations=1.7: Regressions of SAVE2 on Income Uncertainty with Endogenous Fertility Decision (1) Coef StdE 23200 19365 1501 2042 712 3511 24093 12070 ** -20171 6222 ** -61036 29489 ** 1583 142 32041 2137 3237 11432 ** 182 3244 32484 11382 ** -20204 6023 ** -60981 28519 ** (2) Coef StdE 17753 19528 (3) Coef StdE 17718 19448 1550 2091 71 -257 293 -126939 91894 3945 3267 292 100 ** 210 63 ** -8479 3843 ** -21818 11811 * 624 320 * 11545 5760 ** -9888 5374 .035.Table 3.18 223 57 -8264 3929 -24089 11699 686 319 11736 5772 -10074 5321 .
Table 3.8: The Eﬀect of a Change in the Fertility Decision on SAVE1 Fecund HH E(SAVE1|∆CHILD=0) E(SAVE1|∆CHILD=1) N (1) (2) (3) 13.133 12.672 8.695 12.527 10.375 422 422 422 Notes: E(SAVE1|∆CHILD=0) denotes average SAVE1 of the households that did not have a child between 1983-1989 and E(SAVE1|∆CHILD=1) denotes average SAVE1 of the households had they chosen to have a child. 72 .154 10.
Chapter 4 Saving for Children’s College Education 4.000). about 65 percent reported using some previous savings. Gale and Scholz  estimate that the annual ﬂow of parental 73 . Of those contributing to their children’s college costs. 90 percent of dependent undergraduate’s parents contributed to their children’s college costs. According to the 1987 NPSAS. parents contribute a signiﬁcant amount to their children’s college costs.000) it was 98 percent (Presley and Clery ). 65 percent of the parents contributed a positive amount to their children’s college costs as a gift. While the percentage was lower for those in the lower income group (income below $35.1 Introduction The purpose of this chapter is to analyze an important life-cycle saving motive: saving for children’s college education. Understanding the eﬀect of ﬁnancing children’s college education on household saving behavior is important at least for three reasons. and the average amount of their support was about $3. According to the 1996 National Postsecondary Student Aid Survey (NPSAS). First. Using the 1983-86 SCF. for those in the higher income group (income above $70.900 (Choy and Henke ). and 80 percent reported using some current income.
However. Long  ﬁnds that the eﬀect of the ﬁnancial aid tax on asset holdings is smaller than the eﬀect in the prior literature. According to Edlin  and Feldstein . this chapter examines the eﬀect of anticipated educational expenses on household savings. Edlin . Dick and Edlin  and Long  have recently examined the adverse eﬀect of the means-tested student aid process on household asset accumulation. 74 . Using the data on actual expenditures on children’s college education. Feldstein . Second. To date. as shown in Long . According to their estimation. the ﬁnancial aid tax rate on capital income can be as high as 50 percent.contributions totaled about $35 billion. The college ﬁnancial aid system imposes an implicit tax on the savings of households that are potentially eligible for ﬁnancial assistance. the focus has been on calculating the ﬁnancial aid tax and measuring its negative impact on household asset accumulation. which is 12 percent of the aggregate net worth in 1983. the results in Edlin  and Feldstein  depend on a variety of assumptions such as the number of children enrolled in college. families who save for college reduce their eligibility for ﬁnancial aid. Gale and Scholz  convert the ﬂow of college support to a stock of wealth using steady-state assumptions.441. Using alternate but also plausible assumptions. anticipated college costs and the amount of aid that is received and so on. contributions to children’s education yield a wealth of $1. Dick and Edlin  use data on ﬁnancial aid awards to calculate a marginal tax rate and ﬁnd that families with children attending average-priced colleges face a ﬁnancial aid tax ranging from 2 percent to 16 percent.5 billion.
Behrman et al. Without unequal access to schooling. The analyses in Willis  and Becker and Lewis  show that parents with few children have substituted quality for quantity. they ﬁnd an inverse relationship between family size and children’s schooling. Using the National Longitudinal Survey of the High School Class of 1972. child care and bequests have been used as the qualitative measure. they analyze the inﬂuence of size and ordinal position of siblings on the like- 75 . In the empirical investigation of this model. with and without equal access to ﬁnancing for education. The estimates in Tomes  show that family size and children’s schooling are jointly determined. the quality-quantity model of fertility behavior assumes that parents have preferences both for the expenditure per child and the number of children. Tomes  empirically tests whether parental bequests of wealth and human capital investments represent substitute forms of parental transfer. are negatively related to subsequent levels of inheritance. The estimates in Tomes  conﬁrm the prediction of the quantity-quality model that bequests and children’s income are negatively related to family size.  develop a model relating children’s schooling to family size. Steelman and Powell  investigate the relationship between the structure of the sibling group and parental ﬁnancial support for children’s college education. Speciﬁcally. The results of his model conﬁrm that investments in children’s human capital.Third. which are measured by children’s income and years of schooling. and test predictions of their model using the veterans sample of white male twins and the sample of their adult oﬀspring. diﬀerent forms of parental expenditure such as children’s schooling.
an analysis of ﬁnancing college education and family size highlights an important aspect of the quality-quantity model. education and so on. Saving for children’s education is the third most important saving motive after saving for retirement and ‘rainy days’ and accounts for 9. emergencies. bequests. The data set used in the chapter does not provide information on the ordinal position of the child attending college.2 percent of gross saving. using Japanese household data. This chapter also uses the amount of parental expenditure on children’s college education as a measure of child quality. Their results show that the number of siblings signiﬁcantly decreases both the likelihood and amount of parental contribution to children’s college education. Steelman and Powell  argue that later-born children are more favored relative to earlier-born ones due to the family life cycle.7 and 28. Parents have more resources when later-born children reach college age. It would be of interest to investigate this eﬀect on the level of parental support using the information on household savings. A number of studies have analyzed motives for saving such as saving for retirement. 1 76 .1 Given the rapidly rising cost of college tuition.2 In addition.1 percent of gross saving. respectively. saving for ‘rainy days’ and saving for bequests and inter vivos transfers. 2 See Browning and Lusardi  for a survey of the literature. ordinal position alters parental support in favor of later-born children. Horioka and Watanabe  analyze the amount of gross saving and dissaving for each of twelve motives including saving for retirement.lihood and amount of parental support. The results of their analysis show that retirement and precautionary motives account for 25. Moreover. Their ﬁndings also show that the importance of each saving motive depends on the age and the life-cycle stage of the household.
‘rainy days’ (emergencies and unemployment). The last column of Table 4. The table provides the responses of the sample used in this chapter. saving for ‘rainy days. buying a home and other reasons as the most important reason for saving. medical and dental expenses. One exception is Souleles . Among the households saving for retirement. The sample includes households with nonretired heads and spouses (The SCF and restrictions on the sample are discussed in Section 4. income ﬂuctuations and bequests have motivated substantial research. While 35. Souleles  examines consumption of households as they pay for the college expenses of their children.3 percent list education as the most important reason for saving.Although saving for retirement. The SCF contains a question that asks the household’s most important reason for saving.5 percent of households list ‘rainy days’ as the most important reason for saving. education of children.3 percent list retirement and 5. and buying durable household goods. ‘rainy days. His results show that households smooth their consumption into the academic year and do not cut their consumption in the 6-9 months before the academic year starts.3). 15. taking vacations and so on. Using the Consumer Expenditure Survey. Other reasons for saving include saving for ordinary living expenses.1 shows the percentage of households in the 1983 survey citing retirement. His ﬁndings are consistent with the life-cycle theory of consumption and saving.’ is the most cited reason.’ home purchase and children’s education. 77 .1 shows the percentage of households reporting that they cannot or do not save. the motive of saving for children’s education has not been much investigated. Table 4.
The percentage of households in the 25-75 percentile of the wealth distribution citing ‘rainy days’ as the most important saving motive is higher than the percentage of households in the lower and higher wealth groups. and the percentage of households citing retirement as the most important reason increases. This table shows that the number of 78 .4 percent in the top 25 percentile report saving for retirement. Among the households in the bottom 25 percentile of the wealth distribution.’ retirement and other reasons show a systematic trend relative to the total number of children. An almost equal number of households with one or two children and with three or more children report saving for children’s education as the most important reason. Table 4. among households with 1 or 2 children. a higher percentage of the households with one or two children report saving for children’s education than those with three or more children (8. 5.3 percent vs.1 also shows the percentage of households citing each saving motive by the number of children and net worth in 1983. Controlling for the number of children. the percentage of households saving for retirement increases with wealth.7 percent of those in bottom 25 percentile of wealth distribution report saving for retirement. 24. As the number of children increases. the percentage of households citing ‘rainy days’ and other reasons as the most important reason decreases. Among the households in the higher wealth groups. For example.8 percent).The percentage of households saving for ‘rainy days. the eﬀect of the number of children on the percentage of households reporting saving for children’s education disappears. while only 2.
I introduce life-cycle savings into the quality and quantity model of fertility and derive predictions concerning the eﬀect of expected educational expenditures on household savings.2 an79 . Also.children has a signiﬁcant eﬀect on saving motives. and they save in advance for these expenses. We continue to observe this eﬀect even after controlling for the household wealth. The results show that an increase in the number of children decreases the per child college expenditures paid by households by approximately by $317 in 1986 dollars. Using the actual college expenses reported in the SCF. the eﬀect of anticipated educational expenses on household savings are estimated. the empirical ﬁndings provide an answer to why saving is concentrated among wealthier households.000 in children’s college expenses saves $8. The data from the 1983-86 SCF is used to estimate two equations in which the dependent variables are household savings and educational expenses. I also obtain predictions concerning the simultaneous determination of family size and college expenditures per child. Section 4. households save for their children’s college expenditures. The remainder of this chapter is organized as follows.000 more than it would had it not expected to have any college expenses. Further. a household with a 43 year old head expecting to have $2. Other things constant. and the amount of savings increases with the age of the household head. Households with higher income and wealth expect to have higher educational expenses. The results are consistent with the predictions of the Life-Cycle Theory of saving and consumption that households save in advance for children’s college expenditures. In this chapter.
6. For simplicity. Section 4. investment to each child’s education.2 A Model of Saving for College This section considers a world in which individuals (parents) live for two periods. c2 .2) (4. n) subject to c1 = y1 − A c2 = y2 + (1 + r)A − πen 80 (4.5 estimates the determinants of college expenditures and uses these estimates to investigate the eﬀect of expected college expenditures on household savings. the return on accumulated assets (1 + r)A and second period wage income y2 are divided between consumption c2 and paying for children’s college education e. and the family consumes together c1 and saves A to earn interest at the rate of r. 4. Finally. and the number of children to maximize U = U (c1 . In the second period. second-period consumption.3) (4.alyzes a model of the quality-quantity interaction of fertility with household savings. Parents choose ﬁrst-period consumption. chooses to have n children. per capita college investment is assumed to be equal for all n children.4 provides a framework for the empirical analysis of the interaction between savings and college expenditures. a summary and conclusions are presented in Section 4. In the ﬁrst period.3 describes the 1983-86 SCF.1) . e. Section 4. a couple earns y1 . Section 4.
n) (4.where π is the price of education. 81 . equation (4. y2 + (1 + r)A − πen (4. Substituting (4.3) into (4. If the utility function is CES with equal elasticity of substitution between all arguments.6) (4. which results in an increase in accumulated assets. respectively.1) yields the following unconstrained maximization problem: U = U (y1 − A. Since the right-hand side is a constant. The ﬁrst-order conditions are −U1 + (1 + r)U2 = 0 −πnU2 + Ue = 0 −πeU2 + Un = 0 (4.8) where γ is the elasticity of substitution.5) (4. This expression implies that an increase in educational expenses decreases the second-period consumption relative to ﬁrst-period consumption.5) can be written as follows: 1 y1 − A = (1 + r) γ−1 . y2 + (1 + r)A − πen. educational expenses (e) and the number of children (n). a decrease in second-period consumption is likely to decrease the ﬁrst-period consumption. Ue is the marginal utility of children’s education.2) and (4.4) where the three choice variables are accumulated assets (A).7) where U1 and U2 are the marginal utility of consumption in the ﬁrst and second periods. e. and Un is the marginal utility of family size.
To extend the analysis to account for uncertainty.7).6) and (4. Solving the consumer’s problem yields the following equation −U1 + (1 + r)E1 [U2 ] = 0 where E1 represents the expected marginal utility of consumption in the second period conditional on all information available in ﬁrst period. The interaction of the quality and quantity dimensions of choice is reﬂected in the fact that the marginal costs of education and family size depend on the level of each other in equations (4. When uncertainty about future income is assumed. 3 82 . If the third derivative is positive. let us assume that the second period wage income y2 is stochastic. E1 [U2 ] exceeds U2 [E1 ]. household saving can be associated with two diﬀerent saving motives: saving for uncertainty about future income (precautionary saving) and saving for children’s education. then U2 is a convex function. This condition shows that greater uncertainty is linked to greater saving in the ﬁrst period when the third derivative of the utility function is positive. The empirical speciﬁcation of the model described below controls for precautionary saving while it estimates the eﬀect of educational expenses on household savings. In this case. This interdependence implies an inverse relationship between the number of children and educational expenses.3 The combination of a positive third derivative of the utility function and uncertainty about future income reduces consumption in the ﬁrst period.
I use the number of children attending college and the number of years they attended to normalize college expenditures. Household savings are measured in two ways. SAVE1. 4 83 . In 1986. the data does not diﬀerentiate between children away in college or living on their own and with former spouses. savings and other control variables. The 1983 survey contains interviews from a random sample of 3. The college expenditure variable is the outlay of college education per child. The SCF contains detailed information on household assets.3 Data The empirical analysis uses data from the 1983-1986 SCF.4. 2. income and demographic characteristics. The fertility variable (CHILD) is the number of children of either the respondent or spouse. The variables used in the empirical analysis are classiﬁed into four groups: fertility. The respondents were also asked how many years of college their children completed from 1983-85. college expenditure. including those not living in the household. liabilities. In 1986.822 of these households were reinterviewed. Unfortunately.824 households and a high-income supplement of 438 households. respondents were asked if they had any children attending college from 1983-85 and if they had any college expenses on the behalf of their children.4 The college expenditure variable (COLLEXP) captures the quality dimension associated with the expenditure per child. This variable includes children of previous marriages living with former spouses. The ﬁrst measure.
other real estate. educational expenditures and fertility decisions. stocks. Using the reported household income for 1982.5 SAVE1 includes the realized and unrealized capital gains. gender and the educational level of the household head. 1984 and 1985.is the change in net worth between 1983 and 1986 divided by the number of years. and the educational level of the spouse. saving accounts. business equity. loans. These are age. race. marital status. gender of the household head and other household characteristics. 1983. and whether or not the household head is willing to undertake risky investments). call accounts. reasons for borrowing and saving. Keogh accounts. balances outstanding on lines of credit and loans on consumer durables. Other controls include variables that aﬀect savings. money market deposit accounts. Transitory income (TRINC) Total assets is the sum of ﬁnancial assets and nonﬁnancial assets. individual retirement accounts. and the demographic characteristics associated with tastes (urban residence. I estimate household permanent and transitory income. trusts. the value of the primary residence in 1983 is kept constant. a second measure of savings (SAVE2) is used. Net worth (NWORTH) is the total value of household’s assets minus its total liabilities. vehicles and other real assets like art and precious metals. home equity. Whenever a household did not buy or sell a house that was the family’s primary residence. automobile loans. Household permanent income (PERINC) is deﬁned as the predicted income in 1985 obtained from regressing the log of total income on age. education. cash value of life insurance and the later includes residential property. certiﬁcates of deposit and saving accounts). credit card debt. Total liabilities include mortgage debt. where the ﬁrst includes liquid assets (checking assets. In order to exclude unrealized capital gains on the primary residence. mutual funds. bonds. other loans for property. 5 84 . race.
respectively. Table 4.575 in 1986 dollars. the typical household saves $5.690 households. For households with nonzero college expenditures.3 presents average household savings and college expenses by 85 . According to the ﬁrst measure of savings.2 presents summary statistics of the variables used. The sample is also constrained to include only the households with nonretired household heads and their spouses if the head is married. Households with retired household heads are assumed to be in the life-cycle stage of dissaving. The average household net worth in 1983 is $81. Appendix C.931 and $3. These restrictions leave us with a sample containing 1.811. Estimating the relationship between savings and educational expenditures is complicated for families who experienced a major change in composition such as marriage and divorce. The head of the median household reports that it is all right to borrow money for educational expenses.1 gives a detailed deﬁnition of the variables used in the estimation of the model.000 are excluded to avoid the diﬃculty of modeling the relationship between educational expenditures and savings.296. The sample is restricted to families that did not change composition from 1983-86. households with family income above $100.806 and according to second measure. Permanent and transitory incomes in 1985 are $25. Table 4. it saves $4. Also. The average household in the sample is headed by a forty two year old married high school graduate and includes two children.is the diﬀerence between reported income in 1985 and estimated permanent income. the average expenditure is $2.005.
household savings increase with the number of children in college. 4. 25-75 percentile and top 25 percentile) spend less per child as the number of children attending college increases. Households in the top 25 percentile of the wealth distribution with two or more children in college save on average $18. the number of children in college is inversely related to the expenditure per child as predicted by the quantityquality model. college expenditures per child decreases.9) (4. household savings increase with the number of children in college. As the number of children in college increases. However. The data show that college expenses increase with net worth.3 also breaks down savings and college expenses by the number of children in college and net worth in 1983. Savings of households with children in college increase with net worth. Except the households in the bottom 25 percentile of the net worth distribution with two or more children attending college. The data show that households continue to save while children are in college. However.077.4 Empirical Speciﬁcation The simultaneous relation between educational expenses (e∗ ) and house- hold savings (a) is speciﬁed as follows: e∗ = δ1 ni + x1i κ1 + u1i i ai = η2 e∗ + x2i κ2 + u2i i 86 (4.the number of children attending college. Table 4.10) . more than twice as much the households in the same wealth group with one child in college. Households in all three wealth groups (bottom 25 percentile.
κ3 is a vector of parameters. I use estimates of the parameters of a Poisson regression model to construct the completed fertility proﬁle when the household head is 55 years old. The expected completed family size is given by E[n] = exp(x3i κ3 + φi ) (4. δ1 < 0. the completed fertility. 6 87 . i.e. is obtained to estimate the expected educational expenses. u2i ) are assumed to be randomly drawn from a 2-variable distribution with E(ui ) = 0 and E(ui ui ) = . η2 > 0. The structural disturbances ui = (u1i . n. and κ1 and κ2 are the vectors of parameters to be estimated. The model predicts that an increase in the number of children decreases the anticipated and actual educational expenditure.6 Information on educational expenses is available only if the household has a child attending college and if the household spends a positive amount The model is also estimated using the predicted number of children obtained from the Poisson model.11) where x3i is a vector of demographic characteristics. and φi is an age speciﬁc factor. i.e.where x1i and x2i are the vectors of exogenous variables. However. the data on household fertility gives the number of children ever born to a household headed by a person of a certain age. The empirical results hold true for this measure of fertility too. The theoretical model derives predictions concerning the eﬀect of the completed lifetime fertility on the educational expenses. Another prediction of the model is that educational expenses increases household savings. Therefore.
I obtain expected i i educational expenses as follows. households headed by high school and college graduates have fewer children than those headed by persons without a high school degree. Estimates of the coeﬃcients in Table 4. 4. An increase in the permanent income increases the number of children. and a dummy indicating whether the household does not live in a SMSA area (NSMSA). a dummy indicating whether the spouse works for a full time job in 1983 (FSPOUSE). gender (FEMALE). Then I use the estimates of those parameters to construct the proﬁle of anticipated educational expenses. and education of the spouse (HIGHSCHSP and COLLEGSP). Then e∗ is observed to be ei if e∗ > 0 and gi = 1.4 are consistent with previous studies. age (AGE).5 Estimation and Results Table 4. Let gi = 1 indicate that the household has a child attending college. gi = 0 indicate that none of the children are attending college. I estimate a Tobit model for the educational expenditures of the households with children attending college.on ﬁnancing her education. The right-hand variables include household demographics expected to aﬀect the number of children: namely. 88 .4 contains estimates of the Poisson regression model of the fertility equation. Married households have more children. However. First. race (BLACK) and the education of the household head (HIGHSCH and COLLEG). Controlling for permanent income. permanent income (PERINC). martial status (MARRIED).
9). I use the estimates of the regression to predict the completed household fertility when the household head is 55 years old (CHILD). The instrumental estimate of the coeﬃcient on the number of children is almost three times as large as the OLS estimate (-$459 vs. households with spouses working full-time and with high school and college degrees have fewer children. Table 4. Columns 1 and 2 contain the results with CHILD and columns 3 and 4 contain the results with CHILD. age (AGE) and education (COLLEG) of the household head.controlling for marital status. Of the 1. SEMERG. the amount of college expenditure decreases with the number of children. SCHEDUC and SHOME). -$187).690 households in the sample. namely.5 reports estimates of the equation (4. 338 had a child attending college between 1983-86. and 252 reported contributing a positive amount to their children’s college expenses. a dummy indicating whether or not the household head believes it is all right to borrow money for college expenses of children (BEDUCAT) and dummies indicating the most important reason for saving (SRETIRE.03. The average CHILD is 3. Households with children attending college between 1983-86 are included in the estimation of the Tobit regression. As predicted by the quantity-quality model. The right-hand variables also include other factors that might aﬀect the college expenditures. The partial derivative of the expected college expenditure with respect to the number of children is calculated at the mean values of the estimated number of children (CHILD) and other explanatory 89 . and permanent and transitory income (PERINC and TRINC).
respectively. While the average contribution of households in the bottom 25 percentile of wealth distribution is $1. Φ is the standard normal cumuˆ ˆ lative distribution. Estimated contributions of the households with children in college are very close to the actual expenses. The amount of contribution to children’s college education increases with wealth. The average COLLEXP is $1. Households citing saving for retirement and buying a home as the most important reason for saving spend less on children’s education.6 show SAVE1 and SAVE2 for households with 90 . an additional child results in a drop of $317 in expected college expenditures at the mean of values. Table 4. and δ1 and κ1 are the estimates of δ1 and κ1 . the average contribution of the top 25 percentile is $3. CHILD. Households with heads who believe that it is all right to borrow for educational expenses have higher expenditures.6 presents actual and estimated college expenses by household net worth in 1983. ˆ σ (4. Households citing saving for children’s education as the most important reason for saving spend more than other households.093 per child. Estimates in Table 4. to calculate the expected college expenditures (COLLEXP ).5 show that increases in permanent and transitory income increase the level of expenditures for educational expenses.variables as follows: ˆ ˆ δ1 ∗ Φ((δ1 ni + x1i κ1 )/ˆ ). ˆ Using the approximation. The last two columns of Table 4. I use estimates of the Tobit model and the expected completed fertility.12) where σ is the estimate of the standard error.436.789 per child.
households in top 25 percentile of the wealth distribution save almost ﬁve times more if they have a child in college. and columns 3 and 4 contain the estimates for SAVE2. gender (FEMALE) of the household head. Columns 1 and 2 contain the estimates for SAVE1.6 show that wealthier families contribute more to their children’s education and continue to save while their children are in college. Interestingly.7 presents the eﬀect of expected college expenditures on household savings.000 between 1893-86. and the number of children attending college between 1983-86 (NCHCOLL). a dummy indicating whether the household head is willing to take risky investments (RISKY). Table 4. the data in Table 4. However. a dummy indicating whether or not the household had a windfall greater than $3. The estimates of SAVE1 and SAVE2 are very similar. nonurban residence (NSMSA) and dummies indicating household net worth in 1983 (NWORTH25 and NWORTH75).and without children in college. two other reasons for saving. permanent and transitory incomes (PERINC and TRINC). households with greater wealth save more if they have a child attending college. which are retirement and emergencies (SRETIRE and SEMERG). indicating that an increase in expected college expenditure raises 91 . Similar to Table 4. Households in the bottom 25 percentile of wealth distribution save signiﬁcantly less than those without children in college.3. Explanatory variables include age (AGE). In estimates of both equations. the coeﬃcient of expected college expenditure (COLLEXP ) is negative and the coeﬃcient of age interaction term (AGE×COLLEXP ) is positive.
7. Finally.000 to college expenses and compares it to what it would have saved. Unfortunately. Finally. Using the estimates in Table 4. the number of children attending college does not signiﬁcantly decrease household savings. Figure 4.savings after age 28. For each age group. the ﬁgure ﬁrst calculates savings of a typical household expecting to contribute $2. This result does not necessarily mean that households are not saving for children’s college education. By typical. household savings are calculated in ﬁve year intervals. The eﬀect of transitory income on both measures of savings is positive and signiﬁcant. Also. Permanent income increases both SAVE1 and SAVE2. However. households in the bottom 25 percentile of the wealth distribution save $2.493 more and households in the top 25 percentile save $11. had it not expected to contribute a positive amount.1 shows the eﬀect of the age of the household head on SAVE1. I mean a household in the 25-75 percentile of the wealth distribution. The saving behavior of a household with a child in the ﬁrst year of college in 1983 can be quite diﬀerent from a household with a child ﬁnishing up college in 1983. Households citing saving for retirement as the most important reason save more. saving for emergencies does not signiﬁcantly aﬀect savings.833 more than other households. showing that households save approximately 39 percent of their transitory income. the data does not have detailed information on the years that children were attending college between 1983 and 1986. citing a motive other than retirement or emergencies as the most 92 .398 less than those in the middle of the wealth distribution . households with heads who are willing to undertake risky investments save $7.
If we assume. Saving motives change with age and household composition. I also obtain predictions 93 .000 at the age of 43.7 show that the eﬀect of saving for retirement on household saving is positive and raises household savings by $4. I introduce life-cycle savings into the quality and quantity model of fertility and derive predictions concerning the eﬀect of educational expenditures on household savings. This striking result is due to the assumption that this household is assumed not to cite saving for retirement as the most important reason. The household is assumed to have average permanent and transitory incomes for their age group. The results show that savings of the household with an anticipated $2. for example. This ﬁgure only shows that controlling for other factors.000 between 1983-86. If the household does not expect to contribute to children’s college expenses.important saving motive. the eﬀect of anticipated college expenses on savings is positive and signiﬁcant.894. The results in Table 4. who is not willing to undertake risky investments and did not receive a windfall greater than $3.6 Conclusion This chapter examines the eﬀect of saving for children’s college edu- cation on household savings. The eﬀect of expecting to contribute $2000 on household savings is $8. headed by a male. and it increases with the age of the household head. savings decline to zero at the age of 43. 4. this will increase its saving by $4. that this household starts saving for retirement when the household head is 43 years old.000 college expenses increase with age.894.
The main ﬁnding of this chapter is that households save in advance for children’s college expenditures. Other things constant.concerning the simultaneous determination of family size and college expenditure per child. The results are also consistent with the ﬁndings in Souleles . 94 . which show that despite large college expenses. the diﬀerence between savings of households with and without college expenses can be as high as $8. Using the actual college expenditures reported in the 1983-86 Survey of Consumer Finances. households smooth consumption into the academic year and do not cut consumption in the 6-9 months before the academic year starts. I analyze the eﬀect of educational expenditures on two diﬀerent measures of savings. The model uses the expected expenditures and other control variables that aﬀect savings to estimate an equation of savings. which are the change in net worth between 1983 and 1986. this present chapter examines the eﬀect of college expenditures over the life-cycle and ﬁnds that most of the saving done by wealthier households can be attributed to saving to ﬁnance their children’s college expenses. I estimate expected expenditures on children’s college education. The amount of savings for college expenses increases with the age of the household head. The results are consistent with the predictions of the life-cycle theory of saving and consumption that households save in advance for expected expenses.000 at the age of 43. and the change in net worth excluding the capital gains on primary residence. By focusing on household savings.
066 0.000 0.063 0.278 0.212 0.032 25-75p 75 to 100p Source: Survey of Consumer Finances.345 SEMERG SCHEDU 0. SHOME: saving to buy a home.009 0. SRETIRE: saving for retirement. SEMERGE: saving for ‘rainy days.440 0.377 0.053 SHOME 0. .279 0.469 0.083 0.401 0.009 0.043 0.027 0.007 0.391 0.380 NOSAVE 0.337 0.023 HH 0.115 0.074 0.060 0.010 0.057 0.000 0.Table 4.064 0. The number of observations N=1690. 1983.042 0.382 0.042 0.351 0.049 0.1: Saving Motives By the Number of Children SRETIRE 0.079 0.002 0.471 0.049 0.153 CHILD 0 1-2 3 or more 0.023 0.’ SCHEDU: saving for the education of children.120 0.058 0.035 SOTHER 0.016 95 0.543 0. Tabulations are weighted using the sample weights.004 0.070 0.264 0.455 0. Notes: This table reports the proportion of households citing the selected motives as the most important reason for saving.021 0. SOTHER: saving for other reasons and NOSAVE: cannot/does not save.369 0.404 0.339 0.016 0.383 0.381 0.341 0.082 0.330 0.027 0.057 0.087 0.029 0.043 0.033 0.037 NWORTH 0-25p 0 1-2 3 or more 0 1-2 3 or more 0 1-2 3 or more 0.341 0.310 0.013 0.053 0.397 0.000 0.102 0.223 0.068 0.355 0.244 0.
Notes: Tabulations are weighted using sample weights.37 NSMSA 0. 96 .75 TRINC 3296.68 AGE 42.28 0.43 HIGHSCH 0.47 SAVE2 4811.47 2.32 2817.11 12491.2: Descriptive Summary of Variables Variables Mean Std.10 FEMALE 0.53 0. 1983-86. The number of observations N=1690.08 0. Deviation CHILD 2.45 Source: Survey of Consumer Finances.43 COLLEG 0. All dollar values are reported in 1986 dollars.64 NWORTH 81575.1.Table 4.13 0.65 0.14 COLLEXP> 0 2005.43 14.86 0. All variables are described in Appendix C.35 WINDF 0.33 MARRIED 0.08 161860.50 BLACK 0.32 15127.41 33402.13 35397.48 BEDUCAT 0.28 RISKY 0.17 0.24 0.86 PERINC 25931.24 0.36 SAVE1 5806.
97 .3: Savings and College Expenses by the Number of Children in College SAVE1 SAVE2 COLLEXP NCHCOLL 0 1 2 or more NWORTH 0-25p 5041 6661 12357 4206 5277 10317 0 2236 1657 0 1 2 or more 0 1 2 or more 0 1 2 or more 3762 4961 1829 5804 6032 7707 4870 7745 18077 3705 5005 1695 4348 5305 5695 4551 5312 15577 0 905 797 0 1882 951 0 2937 2355 25-75p 75-100p Source: Survey of Consumer Finances. All dollar values are reported in 1986 dollars. The number of observations N=1690. Notes: NCHCOLL shows the number of children attending college between 1983-86.Table 4. 1983-86. Tabulations are weighted using sample weights.
078 0.038 0.038 0.097 ** 0. and * indicates signiﬁcance at 10 percent level. 98 .964 0.126 ** -0.128 ** 0.057 ** -0.389 0. Notes: ** indicates signiﬁcance at 5 percent level.090 ** -0.4: Poisson Regression: Number of Children CONSTANT AGE FEMALE FSPOUSE HIGHSCH COLLEG BLACK MARRIED NONSMSA PERINC/1000 HIGHSCHSP COLLEGSP N OBS Mean of dependent variable Log L R2 Coeﬃcient Std.461 0.435 0.717 0.039 ** -0.Table 4. Error -1.062 ** 1.106 0.145 ** 0.032 0.930 0.062 ** 1690 2.48 0.408 0.43 -2971. Variables are described in Appendix C.004 ** -0.022 0. 1983-86.134 ** 0.293 Source: Survey of Consumer Finances.1.
Table 4.5 22.81 CONSTANT AGE CHILD CHILD PERINC/1000 BEDUCAT SRETIRE SEMERG SCHEDUC SHOME COLLEG TRINC/1000 SIGMA N OBS Proportion of + observations Log L ** ** * ** ** * ** ** -2429.70 Source: Survey of Consumer Finances.9 ** 67.8 232.2 88.7 * 997.6 -407.746 -2429.0 0.8 -372.9 2912.1.5 -1335. Notes: ** indicates signiﬁcance at 5 percent level. Error -601.0 409.6 133.7 338 .5: Tobit Estimates of College Expenditure Equation Coeﬃcient Std.8 -7.2 2524.0 9.1 611.4 555.4 92.4 23.9 ** -187.0 ** 2905.3 134.4 1589.6 -1124.1 1063. 99 . All variables are described in Appendix C.7 1467.8 468. and * indicates signiﬁcance at 10 percent level.7 ** 1391.5 551.4 10.1 550.0 ** 72.1 72.2 19.8 473.8 ** -1103. Error Coeﬃcient Std.9 557.1 -4936.5 18. 1983-86.3 2444.9 -45.3 609.6 1452.9 ** -4903.9 -458.6 408.5 472.
29 1436 44.59 2334 17.65 0 1. Notes: Tabulations are weighted using sample weights. 1983-86.93 3093 COLLEXP 1278 1445 1614 1960 2219 3064 SAVE1 SAVE2 3800 3732 2802 2989 5570 4256 8864 6712 3731 3599 15904 12709 Source: Survey of Consumer Finances. CHCOLL=1 if the household has a child attending college between 1983-86 (0 otherwise).6: College Expenditures and Savings by the Number of Children in College NWORTH CHCOLL 0-25p 0 1 25-75p 0 1 75-100p 0 1 %HH COLLEXP 23. 100 .02 0 7. The number of observations N=1690. All dollar values are reported in 1986 dollars.Table 4.52 0 5.
9 11080.2 5041.2 ** -1284.5 .1 2796.0 382.Table 4.4 ** 336.0 -11398.3 ** 309.4 2434. 1983-86.5 0.5 -1310. a Predicted value of the variable from Tobit regression of educational expenditures.1 4894.5 2409.5 1325.6 407.8 ** 6820.0 1642.9 2474.0 7833.6 ** -9329.9 1728.0 5607.6 2026.2 3.0 1271.2 -10.3 0.8 163.3 -774.3 ** 10.1.0 2460.3 0.3 416.107 SAVE2 Coeﬃcient Std.8 140.2 3.3 2016.8 .084 Source: Survey of Consumer Finances.1 4.8 382.8 3199.2 3422.1 * 4679. Error 22618.5 2493. .8 2783.6 1516.4 2538.7 ** 0. Notes: ** indicates signiﬁcance at 5 percent level.1 3139. All variables are described in Appendix C. and * indicates signiﬁcance at 10 percent level.8 3349.8 761.2 ** -9.6 388.9 139.3 10.6 10944.8 160.8 4.0 -790.3 2954.8 -615.6 -315.7: Eﬀect of Anticipated College Expenses on Savings ** ** ** ** ** ** ** * ** ** ** 101 CONSTANT AGE AGE2 PERINC/1000 TRINC/1000 a COLLEGEXP a AGE×COLLEGEXP SRETIRE SEMERG NWORTH25 NWORTH75 WINDF RISKY FEMALE NSMSA NCHCOLL R2 SAVE1 Coeﬃcient Std.2 1820.3 * 3028. Error ** 22327.
068 − | 28 | 33 | 38 | 43 • | 48 | 53 Age • • −5.Figure 4. • savings of a household with no college expenses. 045 − • 3. 791 − ? savings of a household with $2000 college expenses.1: The Importance of Educational Expenses on Savings SAVE16 10. 102 . 736 − • • • | 23 −1.
Appendices 103 .
taxable interest.Appendix A Appendix for Chapter 2 A. dividends. The SCF does not contain information on some possible deductions such as medical expenses. state and local income taxes. Components of income such as other gains and IRA distributions that are not reported in the SCF are set to zero. job expenses and moving expenses. households are assumed to claim standard deductions instead of itemizing deductions. number of dependents. The SCF collects information on many components of total income. tax-exempt interest. and age of the household head and the spouse. including wage and salaries. All married couples are assumed to ﬁle a joint return. alimony received.1 Estimating Marginal Tax Rates The marginal tax rate of each household is computed using the tax Form 1040 and the information on sources of income. Thus. rents. The sum of household income from all sources gives the adjusted gross income (AGI). In determining ﬁling status and personal exemptions. I use the information on marital status. royalties. business income and farm income. Subtracting the standard deduction and exemptions from the AGI 104 .
Marginal tax rate of the household. =1 if only one child is living in the household. I then apply the appropriate tax rate schedule to calculate the household’s tax liability. =1 if three or more children are living in the household.once with AGI and then with AGI minus 100. Number of children younger than age 22 who live in the household. See Appendix A. AGE MARRIED FEMALE NCHILD Age of the household head in years. A.1. =1 if the household head is married. For homeowners. Consumption demand for housing. The diﬀerence in total tax liabilities divided by 100 gives the marginal tax rate. INCOME ASSET MTR Eh Total assets of the household. =1 if the household head is a single female. 105 . The marginal tax rate is computed by running this method twice .yields the taxable income. it is the opportunity cost of owning a house.3.2 Name Deﬁnition of Variables Description Estimated earnings of the household head and spouse at the age of 45. =1 if two children are living in the household. CHILD0 CHILD1 CHILD2 CHILD3 =1 if no children are living in the household. See Appendix A.
Observed earnings are assumed to diﬀer from permanent income in two ways. YEAR92 YEAR95 YEAR98 =1 if the household is included in the 1992 survey. and c(AGEi ) is a cohort eﬀect. =1 if the household head reports that he is willing to take risky investments.CHAGE13 HOMEOWN WHITE RISKY =1 if the youngest child is older than age 13. A.3 Estimating Permanent Income The measure of permanent income is constructed using the method outlined in King and Dicks-Mireaux . =1 if the household is included in the 1998 survey. εpi is an unobservable variable measuring characteristics such as ability (εpi 2 has zero mean and variance of σs ). and the second is transitory changes in earnings. (A. =1 if the household is included in the 1995 survey. earnings 106 . The ﬁrst is due to the movements along the age-earnings proﬁle over the life cycle. This measure is deﬁned as predicted earnings at the age of 45 plus an individual-speciﬁc eﬀect. Thus. =1 the household is a homeowner. The permanent income Y for individual i is deﬁned as Ln Yi = Zi βp + εpi − c(AGEi ). βp is the parameter vector.1) where Zi is a vector of observable characteristics. =1 if the household head is white.
I assume that the cohort eﬀect. The selectivity-adjusted earnings functions are estimated for the sample consisting of individuals with nonzero earnings. AGEit is the age of the respondent and uit is the log of the transitory component (uit has zero mean 2 and variance of σu .in year t are Ln Eit = Ln Yi + e(AGEit − 45) + uit . (A. Earnings equations are estimated separately for household heads and spouses.2) where e(. I need the estimates of βp . Following King and Dicks-Mireaux . ˆ is zero.2) and estimate the resulting earnings equation using each wave of SCF separately. c(AGEi ). For heads with zero ˆ earnings. permanent income is calculated from Zi βp . ˆ (A.1) and (A.3) 2 2 2 where α = σs /(σs + σu ). King and Dicks-Mireaux  use outside data to impose a cohort eﬀect. I combine (A. εpi and c(AGEi ).) measures the log of the age-earnings proﬁle. The same procedure is used for spouses. with one exception. I assume that α = 0. Instead. to get an estimate of εpi . and this provides the ˆ estimate βp . Their permanent income is adjusted for 107 .5. I calculate the minimum variance estimator of εpi using εpi = α(εpi + uit ). and is assumed to be uncorrelated with εpi ). Finally. Since age-earnings proﬁle e(AGEit − 45) and c(AGEi ) cannot be identiﬁed for this estimation. To construct an estimate of permanent income.
and the probability of nonzero earnings is computed for each spouse from the probit estimates.non-participation at diﬀerent stages of the life cycle as follows: ˆ Yiw = Yi P rob(Ei > 0). ˆ where Yi is the permanent income estimate. 108 . Household permanent income is the sum of the estimates of permanent income for the head and spouse.
AGE Age of the household head in 1983. Mean of the predicted income from the earnings regression. VRI MEANINC PERMINC TRANS NWORTH NWORTH25 Variance of log income. Mean of reported income between 1982-88. =1 if the household in the bottom 25 percent of the net worth distribution in 1983. Household net worth in 1983. Mean of the residual income from the earnings regression. NWORTH90 =1 if the household in the 10 percent of the net worth distribution in 1983. SAVE2 First diﬀerence in net worth between 1983-89 controlling for capital gains in home prices divided by 6.Appendix B Appendix for Chapter 3 B. VRLI Variance of residual of log income from the earnings equation. 109 .1 Name SAVE1 Deﬁnition of Variables Description First diﬀerence in net worth between 1983-89 divided by 6.
Number of children between age 7-12 in 1983. =1 if the household head is white. =1 if the household head is planning to leave a bequest. Number of children between age 13-18 in 1983. =1 if the household owns a home in 1983. Number of children living in the household in 1983.EDUC WHITE MARRIED NCHILD YOUNGCH MIDDCH HIGHSCH ∆CHILD Years of education of the household head in 1983. NADULT ∆NADULT BEQUEST HOWN83 HOWN89 SPFULLT Number of adults living in the household in 1983. =1 if the spouse is working fulltime in 1983. 110 . Number of children between age 0-6 in 1983. =1 if the household head is married. =1 if the household owns a home in 1989. Change in the number of adults between 1983-89. =1 if the household had an additional child between 1983-89.
NWORTH NWORTH25 Net worth in 1986. NWORTH75 =1 if the household is in the top 25 percentile of the wealth distribution. =1 if the household head is female. Amount of expenditure on the college education of a child in 1986 dollars. AGE FEMALE HIGHSCH Age of the household head in 1983. Diﬀerence between net worth in 1986 excluding the capital gains on primary residence and net worth in 1983 divided by 3. PERINC TRINC SAVE1 SAVE2 Predicted 1985 household income. =1 if the household is in the bottom 25 percentile of the wealth distribution. Diﬀerence between net worth in 1986 and 1983 divided by 3. 111 .Appendix C Appendix for Chapter 4 C.1 Name CHILD COLLEXP Deﬁnition of Variables Description Number of children ever born to the household head. =1 if the household head has a high school degree. Diﬀerence between total income in 1985 and permanent income.
112 . =1 if the household head is African-American. =1 if emergencies are the most important reason for saving. Number of children attending college between 1983-86. =1 if children’s education is the most important reason for saving. HIGHSCHSP =1 if the spouse has a high school degree. =1 if the household head is married.000 between 1983-86. SOTHER =1 if the household cited another reason as the most important reason to save. NSMSA NCHCOLL =1 if the place of residence is not in a SMSA.COLLEG =1 if the household head has a college degree. BEDUCAT =1 if the household head thinks it is all right to borrow for education. COLLEGSP FSPOUSE BLACK MARRIED RISKY =1 if the spouse has a college degree. WINDF =1 if the household received a windfall greater than $3. SRETIRE SEMERGE SCHEDU =1 if retirement is the most important reason for saving. =1 if the household head is willing to undertake risky investments. =1 if the spouse is working at a full-time job. SHOME =1 if saving to buy a home is the most important reason for saving.
and portfolio choice. 81(2):S279–S288. 100(2):390–429. Behrman.  Jere R.  Martin Browning and Annamaria Lusardi. Review of Economics and Statistics. family size. 97(2):398–419. Robert A. theories and micro facts. A Treatise On the Family. 1998. Becker. 113 . Journal of Economic Literature. Family re- sources. Household saving: Micro A general equilibrium model of Journal of Political Economy. and Paul Taubman. taxes. 80(2):263–275. and access to ﬁnancing for college education. Cambridge: Harvard University Press. 1989. households: Evidence from the 1983-1989 Survey of Consumer Finances. Becker and Gregg H.  Carol C. Pollak. Journal of Political Economy. 1992. Stockholding behavior of U.  James Berkovec and Don Fullerton. Lewis. Bertaut. 1973.  Gary S. On the interaction between quantity and quality of children. housing. 1991. 34(4):1796– 1855. Journal of Political Economy.Bibliography  Gary S. 1996.S.
 Christopher D. 1998. 1997. Carroll. Carroll. 1999. Staﬀord. Board of Governors of the Federal Reserve System. Journal of Real Estate Finance and Economics. Carroll. Karen D. Buﬀer stock saving and the life-cycle/permanent income hypothesis.  Christopher D. The nature of precautionary wealth. 15(2):159–180. 1997. Krane. Carroll and Andrew A.  Christopher D. Finance and Economics Discussion. 109(1):111–148. Portfolio choices of parents and their children as young adults: Asset accumulation by African-American families. Technical Report 15.  Ngina S.  Christopher D. and Spencer D. Unemployment risk and precautionary wealth: Evidence from households’ balance sheet. 1997.  Christopher D. 114 . Journal of Monetary Economics. Brueckner. Jan K. 41(1):41–71. Samwick. Samwick. 1999. Carroll and Andrew A. 80(3):410–19. American Economic Review. 89(2):377–380. How does future income aﬀect current consumption? Quarterly Journal of Economics. 1994. Quarterly Journal of Economics. 112(1):1–56. Dynan. Chiteji and Frank P. Consumption and investment motives and portfolio choice of homeowners. How important is precautionary saving? Review of Economics and Statistics.
and Durable Goods Purchase Decisions. Finance and Economics Discussion. How prudent are consumers? Journal of Political Economy. 1992. F. Dick and Aaron S. Washington. Is College Fiancial Aid Equitable and Eﬃcient? Journal of Economic Perspectives.  Eugene. Deaton. Precautionary Saving. 1993. 1972. University of California. Board of Governors of the Federal Reserve System. Robin. Unemployment Risk. Owner-occupied housing and the composition of the household portfolio over the life cycle.  Andrew W. National Center for Education Statistics. Susan P. Journal of Public Economics. 115 . Understanding Consumption. San Diego.  Marjorie Falvin and Takshi Yamashita. 101(6):1104–13. IL. 65(3):295–322. New York: Oxford University Press. Technical Report 48. The implicit taxes from college ﬁnancial aid.  Aaron Edlin.  Karen Dynan. Parental ﬁnancial support for undergraduate education. Choy and Henke R. 7(2):143–158. Technical report. 1992.  Angus S. 1997. Dryden Press. U. Edlin. 1998. Technical Report 1998. Department of Education. Fama and Merton H.S. Miller.  Wendy E. Dunn. The Theory of Finance. 1993. Hinsdale.
Permanent income. 85(3):552–66. Vernon Henderson and Yannis M. American Economic Review. Goodman. Housing decisions of American youth. 107(442):537–552.  J. 35:28–45. Goodman and Masahiro Kawai. 73(1):98–113. Demographics of individual housing demand. Ioannides. 1982.  William G.  Allen C. 21(2):228– 241. Regional Science and Urban Economics. 1987. Ioannides. 1995. 1990.  Charles Yuji Horioka and Wako Watanabe. Gale and John Karl Scholz. Why do people save? A micro-analysis of motives for household saving in Japan. College scholarship rules and private saving. and Dongwook Kim. 116 . Journal of Urban Economics. 1983. Hendershott. tenure choice. 20(1):83–102.  Donald R. hedonic prices. Martin Feldstein. Patric H.  J. Haurin. Journal of Economic Perspectives. 12(2):214–237. Intergenerational transfers and the accumulation of wealth. 1997. and demand for housing: New evidence. Journal of Urban Economics. 1994. Economic Journal. 1994.  Allen C. Owner occupancy: Investment vs consumption demand. Vernon Henderson and Yannis M. A model of housing Journal of Urban Economics. 8(4):145– 160. American Economic Review.
1997.  Richard Deitz John Robst and KimMarie McGoldrick.  Arthur B. Household saving and portfolio change: Evidence from the 1983-89 SCF panel. Amsterdam: Elsevier. 1999. 1992. pages 275–347. Are women more risk averse? Economic Inquiry. Pre- cautionary saving and social insurance. Zeldes. 2(3):145–159. Income variability. 9(1):97–105. Regional Science and Urban Economics. 1997. Glenn Hubbard. 117 Journal of Urban . Joseph Hotz. 1995. Handbook of Population and Family Economics. Jianakoplas and Alexandra Bernasek. Jacob Alex Klerman. Miller. 56(1):91–118. Kennickell and Martha Starr-McCluer. 1998. 43(4):381–399.  R. 36(4):620–630. 1988. Jonathan Skinner. Econometrica. An empirical analysis of life cycle fertility and female labor supply. and Robert J.  V. Joseph Hotz and Robert A. Review of Income and Wealth.  Yannis M. 103(21):360–399. Economics. and Stephen P.  Nancy A.Willis. Ioannides. Applied Finance. Journal of Political Economy. An empirical investigation of alternative approches to estimating the equilibrium demand for housing. V. 29(2):219–229. 1981.  Keith Ray Ihlanfeldt. chapter The Economics of Fertility in Developed Countries. Dynamics of the composition of household asset portfolios and the life cycle. uncertainty and housing tenure choice.
69(2):155–193. Kennickell and Martha Starr-McCluer. 2001. L. King and Jonathan I. 58(1):53–73. Maddala.  Lung-Fei Lee and Robert P. 92(366):247–267. Arthur B. life-cycle. 1978. The impact of asset-tested college ﬁnancial aid on household savings. Estimation of some limited dependent variable models with the application to housing demand. 88(2):449–453. 8:357–382. Dicks-Mireaux. 1982. 118 . 1998. Precautionary saving in the small and in the large. Kimball. Wealth and portfolio composition: Theory and evidence. 1983. 1998. 1990. On the importance of the precautionary saving Journal of motive.  Mervyn A. Econometrics. Asset holdings and the Journal of Business and Economic Statistics. Economic Journal.  Miles S.  G. Limited Dependent and Qualitative Variables in Econometrics. Cambridge University Press. American Economic Review. Trost.  Mark Long. 1997. Retrospective reporting of household wealth: Evidence from the 1983-89 Survey of Consumer Finances. Leape.  Mervyn A.S.  Annamaria Lusardi. Journal of Public Economics. Econometrica. 15(3):452–63. King and L-D.
119 . 2000. Technical Report 6185. inheritance and the intergenerational transmission of inequality.  Lala Carr Steelman and Brian Powell. 22(2):237–55. 1981. 1996. 77:185–207. 88(2):207–211. Clery. 1997. Health insurance and precautionary savings. 2001. 1989. James M. American Economic Review.  Nigel Tomes. Technical report. Samwick. National Center for Education Statistics. 86(1):285–295. National Bureau of Economic Research. Journal of Public Economics. 1998. U. Sund´n and Brian J.S.  Annika E. American Economic Review. Washington. 89(5):928–958. Risky income. 1988. Department of Education. life cycle consumption and precautionary savings. Acquiring capital for college: The constraints of family conﬁguration. 54:844–855. Household portfolio allocation and over the life cycle.  Jonathan Skinner.  Nicholas S.  Jennifer B. Souleles. Journal of Political Economy. Middle income undergraduates: Where they enroll and how they pay for their education. The family. American Sociological Review. College tuition and household savings and consumption. Poterba and Andrew A. Gender diﬀerences in the alloe cation of assets in retirement savings plan. Journal of Monetary Economics.  Martha Starr-McCluer. Surette. Presley and Suzanne B.
19(2):209–234. Wolpin. Wolﬀ. Zeldes. A new approach to the economic theory of fertility behavior. Willis.  Stephen P. 1998. 104(2):275–98.  Kenneth I. 92(5):852–874. 81(2):S14–S64. 1981. Journal of Economic Perspectives. Journal of Political Economy. Journal of Political Economy. 1984. Economic Inquiry.  Robert J.  Edward N. Quarterly Journal of Economics. 120 . Recent trends in the size distribution of household wealth. An estimable dynamic stochastic model of fertility and child mortality. 1989. 12(3):131–150. Nigel Tomes. A model of fertility and children’s schooling. Optimal consumption with stochastic income: Deviations from certanity equivalence. 1973.
She later continued her education at the University of Texas at Austin. She received her Bachelor of Arts degree in Business Administration from Boˆazi¸i University in January 1994. she accepted an assistant professor position at Purdue University. where she received a g c Master of Arts degree in Economics in June 1997. 121 .Vita Tansel Yilmazer was born in Izmir. g c She began her graduate studies at Boˆazi¸i University. Eﬀective August 2002. Permanent address: 834 Main Street Apt. 1970. IN 47901 This dissertation was typed by the author. the daugh¨ ter of Onder Yilmazer and Necla Yilmazer. B Lafayette. Turkey on June 2.