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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

Committee:

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

____________________________________________________________ ProQuest Information and Learning Company 300 North Zeeb Road PO Box 1346 Ann Arbor. MI 48106-1346 . United States Code. All rights reserved. This microform edition is protected against unauthorized copying under Title 17.UMI Number: 3110711 ________________________________________________________ UMI Microform 3110711 Copyright 2004 by ProQuest Information and Learning Company.

I would also like to thank my committee members Don Fullerton.’ First. Steve Trejo.Acknowledgments I am grateful to many people who shared the best and worst moments of ‘my dissertation years. iv . Maxwell Stinchcombe. Matias Fontenla. patience. Special thanks go to Asli Kes. Anne Golla. guidance and encouragement. Anne Gorney. Angela Lyons. Mala Velamuri. o ¸ and Vivian Goldman-Leﬄer for their stimulating conversations and friendship. G¨rkem Celik. Peter Wilcoxen and Jacqueline Angel for their valuable feedback and comments. Finally. Adam Winship. for his support. I wish to thank Fikret for always being there for me. Daniel Slesnick. I am indebted to my family for their love and believing in me over these years. in spite of the thousands of miles between us. I would like to thank my advisor.

this dissertation examines the relationship between having children and the motives of saving: (i) to hold assets because of the return they provide. Portfolio Choice and Children: Evidence from the Survey of Consumer Finances Publication No. such as owner-occupied housing. The ﬁrst chapter examines how the number of children living in the household aﬀects the way households allocate their wealth across diﬀerent assets.’ and (iii) to accumulate for anticipated future needs. As a result of the portfolio constraint. v . (ii) to build up reserves as a precaution for a ‘rainy day. The University of Texas at Austin. 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. risky assets and interest-bearing accounts.Household Saving Behavior. Tansel Yilmazer. Ph.D. Slesnick Using the Survey of Consumer Finances (SCF). 2002 Supervisor: Daniel T. 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. such as educational expenses.

Using a life-cycle model that incorporates precautionary motives for saving. The results show that households with higher income uncertainty are less likely to have a child. and after controlling for family size. Further. the second chapter investigates the relationship between household saving and fertility decisions. The results are consistent with the predictions the lifecycle theory of saving that households save in advance for expected expenses to smooth their consumption. vi . savings for college increase with the age of the household head. Using the actual college expenditures reported in the 1983-86 SCF.homeowners decrease the share of the portfolio invested in retirement assets as the number of children increases. The third chapter examines the eﬀect of ﬁnancing children’s college education on household savings. the empirical model estimates the expected expenditures on children’s college education and investigates the eﬀect of expected college expenses on household savings. having an additional child reduces savings of households with young heads and increases savings of those with older heads. income uncertainty has little eﬀect on household savings. this chapter extends the empirical work on precautionary savings. The results show that parents save for college expenses of their children. Also. By examining the implications of income uncertainty on the demand for children.

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. . . . .3 3. . . . . . . . . . . . . . . . . . .4 Estimation and Results . . . . . . . . . . . . . vii . . . .1 3. . . . . . 2. . . . . . . . . . . . . . . . . . . . . . .Table of Contents Acknowledgments Abstract List of Tables List of Figures Chapter 1. . 2. . . . . . . 2. . . . . . . . . . . . Conclusion . . . . . Data . . . . . . on Household . . . . . . . 2. . . . . .5 Conclusion . The Relationship between Fertility and Saving .1 Theory . . Do Children Aﬀect Household Portfolio Allocation? 2. . . . . . . . . . . . . . . . . Chapter 3. . . . . . . . . . . .2 Empirical Model . . . . . . . . . . . . . . . .5 The Eﬀect of Precautionary Motives Saving and Fertility Introduction . . . . . . . 2. . . . .2. . . . . . . . . Estimation and Results . . . . . . Introduction iv v ix xi 1 6 6 12 12 15 17 24 30 44 44 48 51 58 63 Chapter 2. . . . . . .3 Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. . . . . . . .4 3. . . . . . . . . . . .2 The Model . . . . . . . .2 3. . . .1 Introduction .

. Saving for Children’s 4. . . . . . . . . . . . . . . . . . . . 4. . 106 Appendix B.6 Conclusion . . . . . . . . . . . . . . . . . . . Appendices College . . . .2 Deﬁnition of Variables . . . . . . Education . . . . . . . . . . . .Chapter 4. 4. Appendix for Chapter 4 111 C. . . 73 73 80 83 86 88 93 103 Appendix A. . . . . . . . . . . . . . . . . . . . . . . . . 105 . . .1 Deﬁnition of Variables . . . . . . .3 Estimating Permanent Income . . . . . .2 A Model of Saving for College 4. . . . . . . . . . . . . . . . . . .1 Deﬁnition of Variables . . . . . . 4. . . .1 Introduction . . . . . . . . . . . . . . . . . . . .1 Estimating Marginal Tax Rates . . . . A. . . . . . . . . Appendix for Chapter A. . . . . . . . . . . . Appendix for Chapter 3 109 B. . . . . . . . . . . 2 104 . . . . . . . . . . . . . 111 Bibliography Vita 113 121 viii . . . . .4 Empirical Speciﬁcation . . . . . . . . . . . A.5 Estimation and Results . . . . . . . . . . . . . . . . .3 Data . . . . . . . . . . . 4. 104 . . . . . . . . . 109 Appendix C. . . .

. . . . . . . . . . . . 1983 . . . .11 3. . . . . . . . . . Portfolio Shares for Assets by the Number of Children and Age Saving Motives by Age Groups. 1998 . . . . . . Results: Asset Shares and Housing Expenditure of Renters . . . The Eﬀect of a Change in the Fertility Decision on SAVE1 . . . .4 3. . . . Mean Asset Shares.1 4. . . . .8 4. . . . . . Renters: Continued . . . . . .3 2. 1998 . . . Results: Asset Shares and Housing Expenditure of Homeowners Homeowners: Continued . . . . . . . . . . . .6 2. . . . Poisson Regression: Number of Children . . . . . . . . Saving Motives By the Number of Children . . .6 3. . . . . . . . . . . . Results from Probit Estimation . . . . . . . . . . .2 3. . . . . . . . . .4 4. . . . . . . . .7 3. . . . . . . . Expenditure on Housing. . . . . . Income and Income Uncertainty by Age and Fertility Probit: Fertility Decision of Fecund Households . . . . .1 3. . .3 4. . . . . . . . . . . . . . .4 2. .7 2. . . . . . . . . .2 4. . . . . . Mean Income Uncertainty by Household Demographics . . . . . . . . . . . . . . . . . . . Savings. . . . . Descriptive Summary of Variables . . Tobit Estimates of College Expenditure Equation ix . . .List of Tables 2. . . . . . Mean Asset Shares by Year . .9 2. . . . . . . . . .5 2. . . Regressions of SAVE1 on Income Uncertainty with Endogenous Fertility Decision . .3 3. . . . . . . 1998: Continued . . . . . . . . . . Children in . . . . . . . . . Regressions of SAVE2 on Income Uncertainty with Endogenous Fertility Decision . . . . . . . . Mean Asset Shares.8 2. . Savings and College Expenses by the Number of College . . . . . . . . . . 33 34 35 36 37 38 39 40 41 42 43 65 66 67 68 69 70 71 72 95 96 97 98 99 . . . . . . . . . . . . . . . . . . . . Descriptive Statistics by Household Fertility Decision . . . . .1 2. . . .2 2.5 3. . . . . . . . . .5 Descriptive Statistics by Year . . . .10 2. . . . . . . . .

. . . . . . . . . . 100 101 x .4. . . . . . . .6 4. .7 College Expenditures and Savings by the Number of Children in College . . . . . . . . . . . . . Eﬀect of Anticipated College Expenses on Savings . . . . .

List of Figures

4.1

The Importance of Educational Expenses on Savings . . . . .

102

xi

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

1

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

this chapter extends the empirical work on precautionary saving. however. Using a life cycle model that incorporates precautionary motives for saving. This ﬁnding is consistent with the life-cycle theory of saving and consumption and shows that household composition is an important factor 3 . 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.cost of homeownership. The data on U. are not consistent with the predictions of the precautionary saving model that suggests agents faced with uncertainty about future income increase their savings. Chapter 3 investigates the relation between household saving and fertility decisions. 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. 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. household saving show that saving rates are higher for married couples with no children and lower for those with children. having an additional child decreases savings of households with young heads and increases savings of those with older heads. The ﬁndings. By examining the implications of uncertainty on the fertility decisions of households and incorporating fertility decisions as a motive for household saving behavior.S. Also. 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.

an analysis of ﬁnancing college education and family size highlights an important aspect of the quality-quantity model. Using the actual college expenditures reported in the 1983-86 SCF. families who save for college reduce their eligibility for ﬁnancial aid. the quality-quantity model of fertility behavior assumes that parents have preferences both for the expenditure per child and the number of children. Second. First. Third. savings for college education increases with the age of 4 . 90 percent of dependent undergraduate’s parents contributed ﬁnancially to the costs of their children’s education. The college ﬁnancial aid system imposes an implicit tax on the savings of households that are potentially eligible for ﬁnancial assistance. Of those contributing to their children’s college costs in 1987. Chapter 4 estimates the household’s expected expenditures on children’s college education and investigates the eﬀect of expected college expenses on household savings. The results show that parents save for college expenses of their children. Given the rapidly rising cost of college tuition.of life-cycle savings. Also. about 65 percent reported using some previous savings. According to the 1996 National Postsecondary Student Aid Survey. Chapter 4 examines the eﬀect of ﬁnancing children’s college education on household savings. Understanding the eﬀect of ﬁnancing children’s college education on household saving behavior is important for at least three reasons. parents contribute a signiﬁcant amount to their children’s college expenses. This chapter uses the amount of parental expenditure on children’s college education as a measure for child quality.

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 .the household head.

Chiteji and Staﬀord [13] for race. Parents may choose to invest part of their household portfolio in stocks to meet the rising costs of a college education. Jianakoplas and Bernasek [35]. they may hold most of their ﬁnancial assets in riskless See Poterba and Samwick [46]. the literature has focused on the impact of demographic variables such as the eﬀect of age. For example. and interest-bearing accounts. 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. race and gender of the household head on the portfolio composition. Conversely.1 The inﬂuence of children living in the household on the portfolio composition has not been yet discussed. households with children may purchase more housing than households with no children or they may have a higher probability of owning a home. and Ioannides [34] for age eﬀect. So far.1 Introduction Empirical studies of household portfolio composition have identiﬁed large diﬀerences in portfolio allocation choices of diﬀerent demographic groups. King and Leape [41]. risky assets. and Sund`n and Surette [52] e for gender eﬀects. 1 6 .Chapter 2 Do Children Aﬀect Household Portfolio Allocation? 2.

and (iii) the housing expenditure of homeowners and renters. (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. Low levels of retirement savings of U.form to decrease their families’ exposure to risk. paying particular attention to the impact of children on the demand for housing services and homeownership decision. I focus on how the number and age of children living in the household aﬀect (i) the homeownership decision. 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. 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. households with children may decrease the portfolio share for other assets considerably while they increase the portfolio share for housing. Speciﬁcally. Using data from the 1989. 1995 and 1998 SCF. as the result of higher consumption demand for housing.S. Also. Understanding the size of the impact of children on household portfolio allocation is intrinsically interesting. It has also important policy implications. 1992. 7 . this chapter investigates the eﬀect of children on household portfolio composition. The failure of households with children to invest suﬃcient assets in retirement accounts may lead to a lower retirement wealth. If households with children allocate a larger share of their portfolio to owneroccupied housing.

Households with children are likely to have a higher demand for housing services and the consumption constraint can be even more binding. Wolﬀ [56] uses the 1983. households cannot separate the level of consumption of housing services from investment in housing as an asset. and the ownership of their principal residence determines the level of consumption of housing services. Owner-occupied housing diﬀers from other types of wealth in its dual role as both a consumption good and an investment good.Most U. 65 percent of households are homeowners. Explaining the size of the portfolio eﬀect allows a better understanding of the cost of children. Brueckner analyzes the behavior of homeowners. and King and Leape [41] examine the 1960-62 Michigan Surveys of Consumer Finances. 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. In his model. 1989. According to the 1995 SCF. and the value of an average homeowner’s property is 60 percent of its total assets.2 In the presence of tax distortions and transaction costs. its impact on the portfolio choice between housing and other assets has not been discussed much. the general equilibrium model of Berkovec and Fullerton [4] and the numerical analysis of Flavin and Yamashita [20].S. 2 See Henderson and Ioannides [27] and Berkovec and Fullerton [4] 8 . While the dual role of housing has been recognized. Exceptions are the theoretical model of Brueckner [7]. 1992 1995 SCF. and both report that owner-occupied housing accounts for about 30 percent of household assets. households hold a large portion of their wealth in the form of owner-occupied housing.

For example. In Berkovec and Fullerton. Robst et al. Their simulation concentrates on the eﬀect of taxes on the tenure choice and owner-occupied housing. The literature on housing demand has recognized the role of children on the tenure choice and the demand for housing services. Neither of these studies explicitly analyzes the determinants of the consumption demand for housing and the portfolio share for housing. 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. His model analyzes the resulting distortion of the eﬀect of this investment constraint on the portfolio choice of homeowners. The results of his model show that when the constraint imposed by housing is binding. 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.5 percent.an investment constraint requires that the quantity of housing owned is at least as large as the quantity of housing consumed. [36] show that 9 . Harun et al. [26] 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. the homeowner’s optimal portfolio is ineﬃcient in a mean-variance framework. households decide on tenure and quantity of housing taking both consumption and investment motives into account.

these variables do not aﬀect the housing demand of homeowners. households typically invest in only a few of the assets available in the economy. Demographic characteristics such as age. U. After controlling for the household size. Many studies have investigated the reasons that most households choose to hold incomplete portfolios. Ihlanfeldt [33] reports housing demand estimates obtained separately from two samples-recent movers and nonmovers. The results of the previous studies show that dependent children have some impact on the demand for housing.S. as noted in Goodman [24]. marital status. Goodman and Kawai [25] ﬁnd that larger households prefer more housing. little systematic treatment of children has appeared in the estimation of tenure choice and housing demand. The information cost of monitoring and managing a portfolio is suggested as an important reason for holding riskless assets. Among recent movers. deﬁned beneﬁt pensions and mutual funds. 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. For example. 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 . according to the 1995 SCF. 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. however.an additional child increases the probability of owning a home by around 8 percent. only 41 percent of households held stocks directly or indirectly in IRAs.

the eﬀect of age and marital status appears to be signiﬁcant only for some of the assets. Using the Panel Study of Income Dynamics. The results show that the number of children has a positive and signiﬁcant eﬀect 11 .discourage households from investing in risky assets. Their ﬁndings show that age and marital status of the household head signiﬁcantly aﬀect the probability of asset ownership. Bertaut [5] uses the 1983-89 SCF to analyze the eﬀect of household characteristics on portfolio allocation. The empirical model compares the portfolio allocation of homeowners to that of renters. For example. Children living in the household have not been the focus of any study examining the portfolio choice of households. King and Leape [41] analyze a model in which investors choose to hold incomplete portfolios. 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. however. taking into account the eﬀect of children on the consumption demand for housing. His results show that household characteristics such as age and education of the household head are signiﬁcant in explaining the probability of owning stocks. In the conditional demand equations. This chapter aims to do so by examining the eﬀect of the number and the age of children on household portfolio choice. and they estimate equations for both the probability of owning an asset and its demand conditional upon ownership. Their ﬁnding is that parents who held stocks are more likely to have children who hold stocks as young adults. Chiteji and Staﬀord [13] link independent young African-American adults back to their parents.

3 describes the data set and the variables used in the empirical work.1 The Model Theory This section examines the behavior of a consumer deciding whether to rent or own a home. 2. and how much to allocate to other risky assets. 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. Renters invest a smaller share of their portfolio in interest-bearing accounts with an increase in the number of children. Controlling for the number of children and other variables. The number of children also increases the housing demand of homeowners.4. As a result of the portfolio constraint imposed by the housing demand of children. Children living in the household also aﬀects the portfolio choice of renters. A summary of the ﬁndings and concluding remarks are presented in Section 2. Following Brueckner [7] and 12 .2 introduces the theoretical model and discusses the empirical speciﬁcation of the model. The consumer maximizes a multiperiod utility function.2 2.on the probability of owning a home. The remainder of this chapter is organized as follows.2. Section 2. homeowners decrease the portfolio share in retirement accounts while they increase the portfolio share in housing. Section 2. The estimation results are reported in Section 2.5. 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.

and δ is the discount factor. J. 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). . and owner-occupied housing earns rh .1) where y is future labor income. 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). ..2) 13 . I assume that third and subsequent periods are buried in the indirect utility function given remaining wealth at the beginning of the second period. with a0 being the riskless asset. 1. Short selling is ruled out for all assets including housing.Henderson and Ioannides [27]. The consumer’s objective function can be written as follows: U (c. j = 0. U gives the utility from the current consumption. (2. The dollar amount of asset j purchased is denoted aj . housing services (hc ). (2. J. and h ≥ 0. The j th asset earns a gross return of rj . hc ) + δE[V (R + y)]. 1. so that aj ≥ 0.. j = 0.. A consumer in this economy is assumed to obtain utility from the current consumption of a single nondurable good (c). and consumption in future periods that depends on the random total return R from the investment portfolio. The ﬁrst period budget constraint is given by J c=w− p o hc h − j=0 aj . E gives the expected utility.. V is an indirect utility function.

. For homeowners. the return on housing and the return on other assets are assumed to be normal variables with the expected values rh and rj . 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. j = 1. (2. (2. j = 1. The total return of the J portfolio is given by R= j=0 rj aj . (2. For renters.4) where po r is the price of a unit of housing for renters. J.. then the ﬁrst period budget constraint is given by J c = w − po hc − r j=0 aj . In the model.6) and (2. 14 . (2. h The total return of the portfolio is given by J R = rh h + j=0 rj aj .J.where w is her initial wealth and po is the current price of a unit of housing.. . are the variances of rh and rk .5) since h is equal to zero for renters. and θjh is the covariance of returns between asset j and housing. h = 0 in equations (2. θjk is the covariance of returns between asset j and k.. respectively.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 . 2..3) If the consumer rents a house.7) where θhh and θjj .7).

that maximize (2. (2. j = c j 0.2).7). J.2.4). 2. and a∗ .. .8) subject to (2.6) and (2. In the second stage. The empirical model described in the next section focuses on the interaction between these two stages of decision making. j = 0.. are chosen optimally with hc and σ held constant. and to owner-occupied housing (sh ) is modeled as follows.Following Fama and Miller [21] and Brueckner [7].8) where φ(. (2. hc ) + δ V (R + σz + y)φ(z)dz..1) in terms of R. a household determines whether to own or rent a house: H = 1 if Xh β1 + ε1 > 0 = 0 otherwise. h∗ and a∗ . (2. J. how much to spend on housing (Eh ). For both homeowners and renters. and the standard normal variable z as follows: U (c..) is the standard normal density function. that maximize (2.5).9) where Xh is a vector of year dummies and characteristics that are associated 15 . In the ﬁrst stage. σ. First. hc (and thus σ) is chosen optimally. the asset levels aj . (2. The consumer also decides on c∗ . 1. this problem can be solved in two stages. and shares of wealth to allocate to each asset j (sj ). .. .6) and (2.1) subject to (2. c j (2. 1. J. h∗ .2 Empirical Model The joint determination of whether own a house (H=1) or not (H=0). (2.7) and decides to own or rent a house comparing the utilities in two outcomes.. 1.3). I rewrite the objective function (2. The consumer’s problem is to choose c∗ .. j = 0.

. The two stage method described in Lee and Trost [42] is used to estimate the model. J sj = Xβrj + εrj sh = 0 If renter. J.. . and also the housing expenditure: j = 0. (2. and εoj . εoc .. In the ﬁrst stage.with the probability of owning a house. In the second stage. βh .9) provides an estimate of β1 .(2. . . 16 . 1... log Eh = Xc βrc + εrc . respectively. j = 0. φ(X β1 )/(1 − Φ(X β1 )) is used as a regressor for renters in estimating (2. βrj . and ε1 is an error term. εrj . I use ˆ ˆ φ(X β1 )/Φ(X β1 ). βoc and βrc are the parameter vectors to be estimated. Second..11) are assumed to have a joint normal distribution..10) for homeowners. β1 is a parameter vector. a probit model of the tenure choice in equation (2. J sj = Xβoj + εoj sh = Xβh + εh If owner..10) (2.. j = 0.. 1. and the error terms in equations (2.11). where φ and Φ are probability density and cumulative distribution of the standard ˆ ˆ normal distribution. and εrc are the error terms. J. log Eh = Xc βoc + εoc . 1. βoj . . Separate equations are speciﬁed for homeowners and renters.11) where X and Xc are vectors of household characteristics and year dummies.. j = 0.. as a regressor in estimating (2. εh . Similarly. 1. the household decides on the share of portfolio allocated to each asset and housing.9) .

and 7) OTHER includes trusts. The consumption demand for housing is computed for renters and homeowners as follows.3 Total assets are grouped into six categories: 1) ACCOUNT includes all holdings of checking accounts. The SCF constructs sample weights to blend the supplements with the area-probability sample to get a more representative sample of the U. all types of bonds.409 out of 4. 1992. a triennial survey conducted by the Federal Reserve Board.480 out of 3. 5) VEHICLE is the value of all the vehicles the household owns.S. 1.299. Keogh. 401(k)s. certiﬁcates of deposit. population. 1. population and a supplement of high-wealth households drawn from Internal Revenue Service ﬁle of high-income returns.3 Data The data for this study are taken from the 1989.S. saving accounts. 1. 4) HOUSE is the market value of owner-occupied housing. income.143 households. 1995 and 1998 SCF. call accounts. and other deﬁned contribution plans. and mutual funds.2. The survey contains detailed information on household portfolios. in 1992. 6) RESTATE includes the market value of seasonal residences and other property. Each survey consists of a representative sample of the U. in 1995.519 out of 4. 2) STOCK includes all assets held in stocks. 3 17 . cash value of life insurance. and demographic characteristics. and other assets like arts and precious metals.309 households. and in 1998. For owners.906. the supplement consists of 866 out of 3. money market deposit accounts. Investments in businesses are not included in total assets because they generate an income that is diﬃcult to separate from earnings. the cost of housing services depends on In the 1989 SCF. 3) RETIRE includes IRAs.

ρ. is assumed to be the interest rate on treasury bills. the property tax rate (τp ). (2. I assume an annual rate of depreciation of d=0. Property tax rates and mortgage interest payments are reported in the SCF. The housing expenditures (Eh ) of homeowners are then deﬁned as Eh = [(1 − τ )r + d + (1 − τ )τp − (ρ − π)]G − mτ. I make several assumptions. the interest rate (r). A few restrictions are imposed on the sample. is the rate of increase in the median sale price of houses in that year. I impute them using detailed account information on the sources of income and demographics for each household. For renters. Following Henderson and Ioannides [28]. the rate of increase in the nominal price of housing (ρ) and the overall inﬂation rate (π).12) This formulation assumes that homeowners claim tax deductions for property taxes and mortgage interest payments. First.12). is the annual inﬂation rate calculated using the CPI-U deﬂator.1. maintenance and depreciation costs (d). π. Since marginal tax rates are not reported in the SCF. To calculate the housing expenditure by using equation (2. and the rate of increase in house prices.015 for each of the sample years. households that neither rent nor own their homes are excluded for lack of information to cal18 . the income tax rate (τ ). r. the annual rental expenditure reported in the SCF is used as the consumption demand for housing.the gross value of the residence (G). The interest rate. The inﬂation rate. the mortgage interest payment (m). The calculation of marginal tax rates is described in Appendix A.

respectively. The same pattern is true for permanent income (INCOME). 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. Sample demographics show the age of the household head (AGE). respectively. 1995. (ii) it owns both the mobile house and the site. 3.900.773 and 3.807 households in 1989. 1995 and 1998.culate housing expenditure. 4 19 .1 percentile of the weighted wealth distribution in the 1989. 127.1 percent weighted wealth holdings in each wave of the SCF are dropped. households with female heads are headed by single females. 1995 and 1998.1 shows the summary statistics for all the variables used in the estimation. 183. 2. or (iii) it owns part or all of the farm/ranch on which it lives on. 214.509.3. and 1998 SCF. The variables are described in detail in Appendix A. 1992. 209 and 193 were in the 0. households with the highest 0.989 observations. In 1989. 1992. 317 and 309 households were neither renters nor owners and were dropped from the sample. both mean and median wealth (ASSET) have risen since 1992. most of which have not changed much over time. 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.6 However.2. 1992. 116. As a proxy for permanent income. The calculation of permanent income follows King and Dicks-Mireaux [40] and is described in Appendix A. marital status (MARRIED) and gender (FEMALE) of the household head and the fraction of homeowners (HOMEOWN). respectively. I take the estimated earnings of the household head and the spouse at the age of 45 and an individual-speciﬁc eﬀect. 6 The SCF deﬁnes the head of the household to be the husband for all married households. 5 Of the remaining households.4 Second. Table 2. a co-op or a townhouse association. to avoid the inﬂuence of extreme outliers on the regression.5 The ﬁnal sample consists of 13. 3. Therefore.

4 percent of total assets in 1998. there is a steady growth in the portfolio share for STOCK and a steady decline in the portfolio share for RESTATE since 1989. The portfolio share for ACCOUNT declined from 14. representing 39. The ﬁrst column shows the share of households in diﬀerent income.2 percent in 1998 due to an increase in the portfolio share for saving accounts.6 percent in 1998).5 percent in 1998. The second largest asset in the households’ portfolios is VEHICLE (18.7 percent of total assets in 1989 to 10. wealth and children (the number of children living in the household) groups.3 presents housing expenditures of homeowners and renters in 1998. The percentage of households with all children older than age 13 (CHAGE13) has stayed the same since 1992. the share for RETIRE increases sharply. As shown in Table 2. the composition of households’ portfolios reveals the importance of housing as an asset. but it rose to 13. 20 . The increases in ACCOUNT.83 in 1989 to 0. First. VEHICLE and RESTATE.2. followed by ACCOUNT. Table 2.75 in 1995 and stayed the same in 1998. STOCK and RETIRE in 1998 oﬀset the decline in HOUSE.2 presents interesting changes in household portfolio structures over time. Assets in these accounts increased from 5. The average number of children (NCHILD) living in the household declined from 0. This suggests that households have substituted ﬁnancial assets for nonﬁnancial assets. Table 2.3 percent in 1989 to 11. Second. age.was higher for homeowners in 1992 than in other years due to the decline in house prices in that year. HOUSE is the most important asset.2 percent in 1995.

It also increases with the number of children. however. First.030 for renters. VEHICLE is the most important asset held (41. it declines after age 50.4 and 2. The ﬁrst row of Table 2.000 and income below $50. Tables 2.The second column indicates the percentage of each of these groups that are homeowners. wealth and the number of children in the household. renters spend more on housing than owners. The housing expenditures of renters and homeowners also increase with income.8 percent of total assets) following 21 . Since the primary residence is the largest part of homeowners’ wealth.000.042 for homeowners and $6. The percentage of households who are homeowners increases with income. For homeowners. in the remaining two columns of the table.0 percent). 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. Average housing expenditures for homeowners and renters are presented. respectively. accounting for 57. and the number of children.5 show the household portfolio composition in 1998 by household permanent income. the expenditure on housing declines after the age of 65. For renters.5 percent of total assets) followed by ACCOUNT (26. The average housing expenditure is $7. age of the household head. wealth. reaching a peak among households with two children. wealth and the age of the household head.9 percent.4 shows the portfolio shares of assets that homeowners and renters hold. VEHICLE is the third largest asset (7. Among households with wealth below $250. for renters. there are marked diﬀerences in household portfolios of renters and owners. For homeowners.

Of the households with income above $100.6 percent. Several ﬁndings are worth noting. we observe striking diﬀerences in the composition of portfolios by the level of wealth.RETIRE (10. This suggests that households with heads over age 65 substitute 22 . Also. but they hold only 42. in contrast. For higher levels of income. Another noteworthy ﬁnding is that the portfolio shares for STOCK and RETIRE for both homeowners and renters rise with income.2 percent). portfolio composition of households with heads over the age of 65 diﬀers considerably from other age groups’ portfolios. STOCK is the most important asset category with a share equal to 25. First. RETIRE and RESTATE are almost equal for renters and owners.4. Table 2. of the households with income below $15.9 percent of their total assets in housing.6 percent of total assets in housing. Not surprisingly. the portfolio share for ACCOUNT almost doubles both for homeowners and renters over the age of 65 compared to 50-64 year old group. the share of the portfolio allocated to RESTATE and for all households. For example. 42.7 percent are homeowners.2 percent of total assets while housing accounted for only 22.7 percent are homeowners holding 75. The portfolio shares for other assets such as STOCK. For example. accumulation in STOCK relative to other assets increases over age 65.4 also presents the life cycle patterns in household portfolios. Also.3 and 2. the share of the portfolio allocated to STOCK rise at a rapid rate with wealth.000.000. the fraction of households who are homeowners increases. 86. For homeowners. while the housing share of portfolio declines. among homeowners that have wealth exceeding $1 million. as shown in Tables 2.

The portfolio share for owner-occupied housing increases with the number of children. The ﬁrst is their eﬀect on the choice of tenure. The table indicates a strong relation between children and the share of portfolio allocated to housing.3 percent for those with three or more children. Tables 2.9 percent for households with 2 children.3 investigates the eﬀect of children on the tenure choice.5 reveal striking diﬀerences in portfolio structures across income. the portfolio share for HOUSE declines with age among the households headed by persons below age 65.0 percent of the wealth for households with no children. Also. but it stays steady after age 65. For example.5 shows the portfolio shares by the number of children living in the household. Table 2. housing accounts for 56. 60. and table 2. and 65.liquid assets for nonﬁnancial assets. Homeowners invest a smaller share of their portfolio in interest-bearing accounts and stocks with an increase in the number of children. and age groups.5 looks at the link between children and shares of assets in both renters’ and homeowners’ portfolios. Second. Children are likely to aﬀect the portfolio structures in two ways. The results indicate that the number of children living in the household aﬀects the portfolio shares for assets and 23 . and the second is their eﬀect on asset shares of portfolios conditional upon ownership. the relative changes in portfolio shares of assets by income. wealth. the presence of children increases the share of the portfolio allocated to vehicles.4 and 2. Table 2. While portfolio composition diﬀers considerably between renters and homeowners. Finally. age and wealth are similar.

the marital 7 93 households in 1989. Portfolio shares of the J + 1 assets and housing sum to one. and RESTATE in the estimation of the model. STOCK. Dummy variables indicating the number and the age of children living in the household are included in X. and include ACCOUNT. RETIRE. and the disturbance covariance matrix is singular. Then I solve for the parameters of OTHER from the other equations. I drop one group of assets. Of 13. 24 . Moreover. OTHER. 410 report zero wealth holding.7 I exclude those households from the sample and correct for sample selection. HOUSE. VEHICLE. Previous research also indicates that a household’s marginal tax rate (MRT) has an eﬀect on its asset allocation decisions.898 households. and 106 in 1998 had zero wealth holding.4 Estimation and Results The resulting set of equations constitutes an endogenous switching model in the form of a multivariate regression model. permanent income and wealth in determining the asset shares in household portfolios.the probability that a household owns a home. 2. 111 in 1992. Thus. The other variables in X are chosen to be consistent with previous empirical studies. Portfolio choice theory has shown the importance of age. 100 in 1995. Age and age-squared of the household head are included to capture a possible change in portfolio behavior related to the life cycle. The empirical model below investigates the eﬀect of children on both asset shares and homeownership decision.

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

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. and a lower share for VEHICLE.11) for renters. RETIRE and RESTATE. Selfselection occurred in households’ tenure choice.10 present the estimates of the equations (2. Compared to 1989. should they choose to buy homes. while the portfolio share for ACCOUNT and STOCK decreases until the age 40 and 43. STOCK. homeownership would not have the same eﬀect on renters. Since 1995. the 1998 portfolio share for RETIRE is 5. RETIRE and HOUSE for homeowners are all statistically signiﬁcant. As renters have two or more children.to HOUSE and VEHICLE.9 and 2. and the share for VEHICLE is signiﬁcantly higher for households with three or more children. The eﬀect of children is less pronounced for renters than for homeowners.7-2. It leads to a decrease in the share allocated to ACCOUNT. renters have shifted toward RETIRE in their portfolio. For these assets.0 percent higher in renters’ portfolio. for example. RESTATE and OTHER and a decrease in the share for ACCOUNT and VEHICLE. The coeﬃcients on the selection terms in equations for ACCOUNT. An increase in total assets leads to an increase in the share for STOCK. More permanent income is associated with a higher share for ACCOUNT.10 report coeﬃcients of the selectivity variables. Tables 2. Tables 2. RESTATE and OTHER. the share for ACCOUNT decreases. The portfolio share for RETIRE increases with age until the age of 58. The estimates of the Mills ratios for renters are signiﬁcantly diﬀerent from zero 28 . respectively.

all of the children in the household are younger 29 .8 and 2. 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.9 percent higher housing expenditure than homeowners with no child. This implies that other than in regards to these three assets. Homeowners with one child have 11. The last two columns in Tables 2. the expenditure on housing increases with the number of children.10 present the estimates of the housing expenditure equation. After the second child. 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.11 presents the estimates of shares for assets that a typical homeowner holds. I mean a household headed by a white married. 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. but the number of children has no eﬀect on renters’ expenditure. having more children increases the housing expenditures of homeowners by only 3. The housing expenditure of homeowners increases 8. For homeowners. RETIRE.for ACCOUNT.3 percent with the second child. On the other hand. and RESTATE. The age of the children in the household has no eﬀect on the housing expenditure of renters nor homeowners. For both renters and owners. there were no signiﬁcant diﬀerences in the average behavior of the two groups prior to home purchase.2 percent. Table 2. By a typical household.

HOUSE is the most important asset.11 include both of these eﬀects. Using a 30 . conditional on the tenure choice. 1995 and 1998 SCF. more is invested in RETIRE. The chapter examines the impact of children on the homeownership decision and the constraint of consumption demand for owner-occupied housing. Second. and its importance in the portfolio increase with the number of children living in the household. 1992.160) and permanent income ($46. this chapter investigates how the number and the age of children living in the household inﬂuence the portfolio composition of households. The portfolio shares of assets calculated in Table 2. The number of children has a negative eﬀect on the portfolio share for RETIRE. At all ages. As mentioned above.690) and has a 15 percent marginal tax rate.5 Conclusion Using the 1989. VEHICLE is the second most important asset in the portfolio when the household head is 30 years old. an increase in the number of children increases the probability that a household owns a home. children have two eﬀects on the portfolio structure of households. As the household head reaches middle age. 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. 2. First. The household head is willing to take risky investments and holds mean wealth ($188. children change the demand for each asset.than age 13. and the share allocated to RETIRE becomes the second largest in the portfolio.

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. As homeowners have more children.S.switching regression model that takes into account the consumption demand for housing. the ratio of housing to total assets increases as the number of children increases. for households with children. the portfolio share for ﬁnancial assets such as interest-bearing accounts and retirement accounts decreases. This result suggests that. 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. However. and the portfolio share for housing increases. Considerable research has focused on whether U. the ratio of retirement accounts to total assets in renters’ portfolios does not signiﬁcantly decrease with the number of children. households are saving enough for retirement. the chapter compares the determinants of portfolio allocation of homeowners to that of renters. One direction for further research is to include the liabilities and bor31 . the consumption demand for housing is higher than the investment demand. Therefore. 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. Since households cannot separate the level of consumption of housing services from their investment in housing as an asset.

Most households ﬁnance their home purchases with mortgage debt. The impact of children on the portfolio share for housing may be an important determinant of household mortgage debt.rowing constraints of households into the model of portfolio choice. 32 .

695 47.61 3.50 3.054 49.59 0.750 0.9 0.773 0.3 0.829 116. The text deﬁnes total assets. 2) All dollar values are reported in 1998 dollars.985 6.525 101.97 48.900 0.2.191 92.8 0.164 0. All variables are deﬁned in Appendix A.75 0.131 5.12 0.80 0. Notes: 1) Tabulations are weighted using sample weights.64 0.27 0.158 0.807 0.319 50.664 6.28 0.660 12.51 2.509 0.28 0.65 0.968 46. 1989-1998.154 0.97 48.59 0.59 0.83 0.328 206.151 203.11 0.65 0.66 0.815 258.75 0. 33 .58 0.12 0.5 0.1: 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 47.28 0.55 3.Table 2.684 92. permanent income and net worth.14 0.658 222.97 48.97 Source: Survey of Consumer Finances.

043 0.143 0.067 0.130 0.394 0.072 0. 34 . 1989-1998. HOUSE.105 0.076 0.208 0.059 0.059 0. RETIRE.047 0.053 0. and OTHER.432 0. STOCK.050 0.112 0. 2) The text deﬁnes the assets called ACCOUNT.197 0. VEHICLE.Table 2.410 0.415 0.057 0. RESTATE.132 0.186 0.2: Mean Asset Shares by Year 1989 Portfolio Shares ACCOUNT STOCK RETIRE HOUSE VEHICLE RESTATE OTHER 1992 1995 1998 0.072 Source: Survey of Consumer Finances.043 0.076 0.094 0.196 0. Notes: 1) Tabulations are weighted using sample weights.068 0.

04 5.931 6.293 $15-30K 22.030 Income Below $15K 10.40 34. Notes: 1) Tabulations are weighted using sample weights.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 22.475 5. HO represents homeowners and RR represents renters.26 21.72 3.866 4.976 7.587 95.29 4.69 3.69 4.72 78. 1998 Eh 1998 dollars %HH %HO HO RR All households 100 66.89 6.042 6.555 93.078 7.55 6.03 21. 1998.002 6.72 14.645 61.065 7.843 9.883 Above $100K 8.183 7.46 72.438 8.43 9. 2) HH represents all households.77 67.09 64.12 80.081 $30-50K 29.22 7.847 15. 35 .90 12.378 $50-100K 29.741 7.16 12.546 80.456 11.677 6.486 95.24 86.391 Source: Survey of Consumer Finances.564 5.93 1.29 68.400 5.46 14.263 5.22 64.49 36.Table 2.496 6.024 6.489 32.42 78.78 7.3: Expenditure on Housing.081 6.195 5.28 9.973 6.35 42.08 22.803 8.17 15.38 29.79 64.54 5.764 6.90 19.50 51.

166 0.046 0 0 0 0 0 0.293 0.415 0.112 0.112 0.083 0.102 0.205 0.Table 2.043 0 0.054 0.090 $30-50K 0.256 0.183 0.608 0.730 0.4: Mean Asset Shares.091 0.137 0.062 0.075 Age Under 35 0.090 0.040 0.028 0.097 0.401 0.080 0.042 $50K-100K 0.093 $15-30K 0.132 0.630 0.559 0.062 Above $100K 0.135 0.021 0 0.049 0.212 0.050 0 0.014 0 0.287 0.071 0 0.022 0.234 0.064 0.122 0.048 50-64 0.082 Above 1000K 0.019 0.453 0.078 0.072 0.135 0.541 0.047 0.007 0.074 0.077 0.111 0 0.025 0.157 0.107 0.033 0.181 0.158 0.055 0.066 $50-100K 0.064 0.091 0.162 0.089 0.068 0 0.251 0.192 0.238 0.031 0.032 0.049 0.047 0. 1998 ACCOUNT STOCK RETIRE HOUSE VEHICLE HO RR HO RR HO RR HO RR HO RR 0.068 0.162 0.143 0.579 0 0.041 0.645 0.092 0.213 0.010 0.226 0.151 0.445 0.454 0.002 0.075 continued on the next page.011 0.059 0.190 0.004 0.128 0.436 RESTATE HO RR 0.750 0.199 0.071 0.490 0.129 Wealth Below $50K 0.694 0.028 0.086 0.061 0.083 0.047 0.052 0 0.062 Above 65 0.078 0.069 0.165 0.017 0.054 $100K-250K 0.127 0.080 0.047 0.270 0.061 0.046 0.535 0.056 0.022 0.489 0.027 0.759 0. .019 0.122 0.091 0.040 35-49 0.172 0.201 0.281 0.587 0.087 0.252 0.018 0.149 0.073 $250-1000K 0.051 0.020 0.111 0.147 0.109 36 All households Income Below $15K 0.086 0.055 0.101 0.049 0.413 0.260 0.359 0.149 0.056 0.389 0.065 0.295 0.088 0.221 0.485 0.089 0.374 0.015 0.039 0 0.

577 0. Notes: 1) Tabulations are weighted using sample weights. VEHICLE.038 0. The text deﬁnes the assets called ACCOUNT.222 0.098 0. 2) All dollar values are reported in 1998 dollars.373 0.088 0. RETIRE.069 0.019 0.110 0. STOCK.102 0.560 0.070 0.040 0.026 0. .062 0. 3) HO represents homeowners and RR represents renters.117 0.040 0.Table 2. 1998: Continued ACCOUNT STOCK RETIRE HOUSE VEHICLE HO RR HO RR HO RR HO RR HO RR RESTATE HO RR 0.044 0.495 0.032 0.044 0.195 0.087 0.045 0.609 0.288 0. HOUSE.471 0.085 0.122 0.044 0.098 0. and RESTATE.061 0.055 0. 1998.049 0.087 0.653 0 0 0 0 0.115 0.052 0.038 0.512 Children CHILD0 CHILD1 CHILD2 CHILD3 37 Source: Survey of Consumer Finances.048 0.200 0.5: Mean Asset Shares.089 0.074 0.

341 0.174 0.287 0.261 0.193 0.000 0.080 0.047 ** 0.040 ** -0.042 ** 0.085 0.034 ** 0.007 0.072 0.046 0.6: Results from Probit Estimation HOMEOWN Coeﬃcient Standard Errors Marginal Eﬀects -4.579. The number of observations N=13.404 0.137 0.108 0.747 0.010 2.137 ** 0.029 -0. 38 .210 0.2.053 0.153 ** 0.049 ** 0.052 0.044 ** 0.304 0.000 MTR RISKY WHITE YEAR92 YEAR95 YEAR98 Notes: 1) ** indicates signiﬁcance at 1 percent level. and * indicates signiﬁcance at 5 percent level.040 -0.030 0.005 ** 0.096 0. 2) Variables are deﬁned in Appendix A.030 ** 0.041 * -0.004 ** 0.102 -0.014 -0.063 0.Table 2.143 0.005 ** 0.118 0.050 CONSTANT AGE AGE2 /100 MARRIED FEMALE CHILD1 CHILD2 CHILD3 CHAGE13 INCOME/10.052 ** 0.

003 0.006 0.006 -0.008 -0.006 0.006 -0.008 0.004 0.056 0.005 -0.007 0.007 0.432 0.002 -0.003 -0.003 -0.002 0. .005 0.013 0.006 * CHILD2 -0.019 0.009 0.049 0.031 * STOCK Coef SE -0.004 0.005 0.021 0.020 -0.001 0.007 -0.003 -0.021 0.006 ** CHILD3 -0.002 0.002 -0.027 0.008 0.007 ** CHAGE13 -0.003 -0.062 0.004 0.003 -0.398 0.000 0.032 0.003 ** YEAR98 -0.004 0.003 0.005 0.023 0.010 ** * ** continued on the next page.054 ** AGE -0.026 0.018 ** MR:+ wealth -0.001 -0.013 0.021 0.063 0.011 0.008 0.087 0.198 0.002 ** L ASSET 0.003 -0.063 0.125 0.004 0.067 0.001 0.061 0.007 -0.002 0.006 -0.031 0.056 0.003 ** YEAR95 -0.009 0.026 0.069 -0.000 0.024 0.022 0.009 0.003 0.063 0.002 -0.013 0.010 0.009 -0.020 0.008 0.018 ** RISKY -0.027 0.027 0.002 0.011 -0.012 0.001 ** AGE2 /100 0.002 -0.006 -0.307 0.001 0.190 0.004 -0.008 0.001 0.029 0.115 0.Table 2.013 0.023 0.515 0.006 0.001 ** MARRIED -0.092 0.004 0.010 0.003 0.016 0.002 0.006 0.001 0.001 0.006 -0.001 0.455 0.089 0.007 -0.009 0.007 0.004 0.006 L INCOME -0.003 0.006 ** FEMALE 0.020 0.002 0.001 0.010 0.001 -0.054 RETIRE Coef SE -0.008 0.029 0.007 -0.010 0.005 0.020 -0.001 -0.039 VEHICLE Coef SE 0.007 -0.009 0.077 0.016 0.037 0.007 0.007 0.024 0.021 0.003 ** YEAR92 -0.005 0.005 0.033 0.024 0.004 ** MR:home -0.005 -0.112 0.006 0.008 0.006 0.049 HOUSE Coef SE 1.001 * MTR -0.021 0.7: Results: Asset Shares and Housing Expenditure of Homeowners ** ** ** ** ** ** ** ** 39 ** ** ** ** * * ** ** ** ** ** ** ** ** ** ** ** * ** ** ** * ** ** ** ** ** ** ** ** ** ** ** ** ** * ** ACCOUNT Coef SE CONSTANT 0.005 CHILD1 -0.023 0.003 0.010 0.012 0.006 0.007 0.059 0.005 0.004 0.

120 ** ** ** ** ** RESTATE Coef SE CONSTANT -0.005 -0.036 Notes: 1) ** indicates signiﬁcance at 1 percent level.005 -0.002 0.007 * L INCOME -0.025 0. .015 0.000 0.025 MR: + wealth 0.025 0.010 0.066 0.025 0. and * indicates signiﬁcance at 5 percent level.009 FEMALE -0.043 0.023 0.002 0.004 0. All variables are deﬁned in Appendix A. The number of observations N=10.008 0. and OTHER.503 0.004 -0.005 ** MR:home -0.006 0.002 0.8: Homeowners: Continued ** ** ** ** ** ** ** ** ** 40 log Eh Coef SE * -0.001 0.009 ** CHILD1 -0.003 -0.017 0.052 0.014 0.001 ** MARRIED -0.008 CHILD2 -0. MR represents Mills Ratio.220 0.010 0.568 0.012 0.005 YEAR92 0. RETIRE.008 ** CHILD3 -0.584 0.001 0.017 0.005 -0.119 0.007 ** * * 1.036 0.005 YEAR98 -0.177 0.024 0. 2) The text deﬁnes the assets called ACCOUNT.018 0.049 -0.018 -0.181 0.002 ** 2 AGE /100 -0.080 ** AGE 0.024 0.001 0. VEHICLE.004 0.204 0.068 0.094 0. RESTATE.307 0.006 -0.003 0.053 OTHER Coef SE -0.003 0.015 -0.021 0.002 ** MTR -0.011 ** 0.004 0.393 -0.023 0.015 0.001 0. STOCK.004 -0.2.025 ** RISKY -0.018 0.001 0.008 0.019 0.158 0.116 0.008 CHAGE13 0.004 0.002 0. HOUSE.246 0.004 -0.032 0.008 0.010 0.189 0.004 0.001 -0.002.002 -0.007 0.003 ** L ASSET 0.202 0.017 0.004 0.234 0.Table 2.025 -0.004 -0.005 * YEAR95 0.

033 0.086 0.000 0.285 0.019 0.038 0.018 0.014 ** L ASSET -0.035 0.017 CHILD2 -0.017 0.030 0.048 -0.031 0.319 0.014 0.017 0.008 -0.003 0.381 0.013 * CHILD1 -0.010 0.003 0.012 0.002 ** MARRIED -0.079 * RISKY 0.012 0.008 -0.074 0.026 -0.016 0.035 VEHICLE Coef SE 2.001 0.024 0.059 0.022 0.019 -0.014 ** 0.009 0.026 0.038 * MR:+ wealth 0.017 0.077 0.010 0.005 0.013 0.154 ** 0.001 0.052 0.015 -0.004 ** MTR 0.008 0.022 L INCOME 0.023 0.011 0.064 ** 0.039 STOCK Coef SE -0.026 -0.027 0.014 0.015 -0.019 0.013 0.015 0.Table 2.008 0.029 0.243 0.9: Results: Asset Shares and Housing Expenditure of Renters ** ** ** ** ** ** ** * ** ** ** ** ** ** * ** ** ** 41 ACCOUNT Coef SE CONSTANT 0.072 0.130 0.089 0.014 YEAR95 -0.003 ** AGE2 /100 0.007 0.050 0.061 0.120 0.004 -0.019 ** CHILD3 -0.011 ** 0.004 0.019 0.001 -0.010 0.018 0.002 ** 0.003 0.015 * YEAR98 0.006 0.015 0.014 0.014 0.097 -0.051 0.039 0.014 MR:home -0.005 0.059 0.007 0.173 AGE -0.001 0.005 0.020 -0.000 0.033 0.053 ** continued on the next page.019 0.027 0.015 0.109 0. .002 ** -0.002 0.028 0.080 0.011 -0.015 0.006 -0.007 0.001 0.025 0.021 0.204 0.079 0.019 0.004 0.011 0.010 0.103 -0.002 0.070 0.793 0.243 -0.068 0.054 0.023 0.034 0.037 RETIRE Coef SE ** -0.021 ** CHAGE13 -0.012 YEAR92 -0.020 0.021 ** FEMALE 0.029 0.014 0.032 0.001 0.

STOCK.010 CHILD1 0.009 * YEAR95 -0.017 0.012 0.037 0. RESTATE.017 0.029 0.069 0.022 0.002 * MARRIED 0.067 0.011 CHILD2 -0.073 * ** ** ** OTHER Coef SE 0.014 0.014 -0.125 -0.334 0.045 0.365 -0.030 0.054 MTR -0.005 ** -0.042 0.020 0.038 0.035 -0.012 CHILD3 -0.Table 2.003 -0.014 0.000 0.030 0.2.130 * AGE 0.032 0.010 0.002 2 AGE /100 -0. MR represents Mills Ratio.005 0.014 -0.285 -0.001 0.002 -0.008 RISKY 0.003 -0.012 0.061 0.027 0.577.030 0.006 ** ** RESTATE Coef SE CONSTANT -0.118 0.007 0.064 0.035 0.021 0.020 -0.001 0.018 0.011 0.038 0.011 0. The number of observations N=3.005 0.020 0.315 0.033 ** MR: + wealth -0.002 0.011 -0.001 0.044 0.083 0.036 0.016 0.001 0.038 ** Notes: 1) ** indicates signiﬁcance at 1 percent level and * indicates signiﬁcance at 5 percent level.001 0.073 ** 0. HOUSE.004 0.004 -0.365 0.005 0.189 0.020 0.062 0. VEHICLE.580 0.014 -0.014 0.173 0.010 * YEAR98 -0.038 0.014 CHAGE13 -0.109 0.004 0.014 -0.102 0.017 0.110 0.10: Renters: Continued ** ** 42 log Eh Coef SE 4.004 0.009 YEAR92 -0.033 -0. All variables are deﬁned in Appendix A.030 0.024 MR: home 0. RETIRE.001 0.010 L INCOME 0.004 0.015 FEMALE -0. 2) The text deﬁnes the assets called ACCOUNT. and OTHER.022 0.003 ** L ASSET -0. .

STOCK.Table 2.056 0.043 CHILD1 0.036 0.064 0.094 0.047 0.058 0.044 0. VEHICLE. HOUSE.038 0. 43 . and RESTATE.033 0.611 0.602 0.534 0.030 CHILD2 CHILD3 0.090 0.114 0.132 0.053 Notes: The text deﬁnes the assets called ACCOUNT.036 0.552 0.047 0.043 0.650 0.048 0.099 0.626 0.105 0.064 0. RETIRE.100 0.079 0.594 0.093 0.577 0.037 0.023 0.049 0.040 0.120 0.038 0.070 0.043 0.049 0.047 0.095 0.102 0.055 0.101 0.055 0.088 0.103 0.053 0.043 0.089 0.086 0.590 0.112 0.058 0.128 0.049 0.111 0.061 0.617 0.096 0.063 0.044 0.056 0.057 0.122 0.607 0.141 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 0.054 0.642 0.

Yet.Chapter 3 The Eﬀect of Precautionary Motives on Household Saving and Fertility 3. consumption proﬁles over age are hump-shaped. Dynan [18] and Starr-McCluer [50] ﬁnd lit1 2 See Zeldes [58]. Carroll [8] shows that this kind of consumption proﬁle is consistent with a precautionary saving model in which individuals face uncertainty about their future earnings.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. As an extension to the traditional life-cycle model. tracking the ageearnings proﬁle. [32] and Carroll [9]. these models are able to explain some of the empirical consumption puzzles. Deaton [15] and Browning and Lusardi [6] give a list of empirical puzzles. empirical work on the strength of precautionary saving has provided mixed evidence. Skinner [48].1 Introduction Many recent studies have recognized the role of precautionary motives on household saving behavior. 44 .2 For example. however. the standard life-cycle model suggests that households smooth consumption and spread resources across periods of high and low income. Kimball [39]. Hubbard et al. In many household-level data sets.

ignoring the eﬀect of uncertainty on household composition.tle or no evidence for precautionary motive. Furthermore. the precautionary motive includes saving to protect the well-being of children against income ﬂuctuations. household income or the age of the head might aﬀect household saving and fertility simultaneously. and incorporating the restrictions of the theoretical model. For example. See Browning and Lusardi [6] and Carroll et al. the life-cycle motive includes saving for children’s education. given precautionary and other motives. [10] for the details. Browning and Lusardi [6] and Carroll et al. this chapter extends the empirical work on precautionary saving. ﬁnally.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. [12] and Lusardi [44] ﬁnd more support for the precautionary motive. [10] suggest that the mixed results might be due to the diﬃculties in empirically testing for precautionary saving. Most of a household’s saving motives can be grouped into one of three categories: life-cycle motives. and bequest motives. By examining the implications of uncertainty on the fertility decisions of households and incorporating fertility decisions into household saving decisions. that is. Yet the causal eﬀect might go in the opposite direction. precautionary motives. fertility might be aﬀected by uncertainty or income ﬂuctuations. the bequest motive includes saving to leave assets to children. 3 45 . It seems reasonable that these motives are aﬀected by the presence of children. and. ﬁnding an appropriate instrument. This chapter takes account of the fact that children are endogenous along with the The problems include proxying certainty. whereas Carroll and Samwick [11].

Most life-cycle fertility models incorporate some types of uncertainty. with 18 percent.1 presents the proportion of households citing the following motives -‘rainy’ days. retirement. The most frequently reported reason for saving was to increase resources for ‘rainy days’ such as unemployment and unexpected needs.1 percent. [30] for a survey of life-cycle fertility models. This suggests that the relative importance of saving for each motive depends highly on the composition and the life-cycle stage of the household. When disaggregated into age groups. 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. The second most frequent reason was saving for retirement.4 For example. saving for retirement peaking between age 51 and 60. all of the four reasons reveal a hump shape: saving for ‘rainy days’ peaking in the 41-50 age group. the eﬀect of income uncertainty on fertility over the life-cycle.7 and 4. namely. More than 32 percent reported that ‘rainy days’ were an important motivation for saving.saving behavior when estimating the eﬀect of children on savings. This chapter also addresses a neglected topic in the childbearing literature. The proportion of households citing saving for children’s educational expenses and home purchase were 5. Wolpin [57] estimates a dynamic stochastic model of fertility within 4 See Hotz et al. Table 3. saving for a home purchase peaking below age 31. respectively.3). 46 . and saving for the education of children peaking between age 31-40.

however. None of these studies. have speciﬁcally analyzed whether uncertainty about earnings is a signiﬁcant factor on the choice of whether or not to have a child. Using the data from the panel of 1983-89 SCF. and thus the variance of income does not appear in the decision function. I ﬁnd that households with higher income uncertainty are less likely to have a child. Dunn [17] ﬁnds consumers respond to increases in the unemployment risk by postponing purchases of a home or a vehicle.) 5 47 . This chapter also examines whether having a child has an eﬀect on Wolpin [57] presents a model in which income is stochastic but his model also assumes that households have quadratic utility. 6 Becker [1] suggests that children can be viewed as durable goods yielding psychic income to the parents.an environment where infant survival is uncertain.5 Hotz and Miller [31] 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. even after controlling for the fact that saving is endogenous to the fertility behavior. and consider a number of uncertainties such as the outcome of the contraceptive eﬀort. there is evidence that income uncertainty has a direct eﬀect on fertility and family size. 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. In a study that addresses whether unemployment risk is an important factor in the timing of the purchase decision of durable goods. and transitory shocks to the wife’s wage. the time path of the husband’s income. Thus. and does not aﬀect savings of the rest of the population. However. The ﬁnding is consistent with previous studies that found little or no eﬀect of precautionary motive on savings.6 This chapter examines whether income uncertainty is associated with lower fertility and higher savings. this chapter can be viewed as a combination of those two prior works.

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.

3.2

**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 :

T

U=

t=0

β t U (Mit , Cit )

(3.1)

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

(3.2)

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

(3.3)

50

then they should also reduce their ‘consumption’ of children. liabilities. 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. and η1 should be negative. as suggested by the precautionary saving model. This data set contains detailed information on household assets. and u2it is an error term representing unobservable variables. η1 and η2 are parameters to be estimated.3). Maddala [45] shows that the resulting estimates of the coeﬃcients are consistent. If consumers react to increases in uncertainty by cutting down their consumption. The model is estimated using a two- stage estimation procedure described in Maddala [45]. This implies that households with higher income variability are less likely to have a child. The 1983 SCF interviewed a 51 . Note that the model is identiﬁed even if u1it and u2it are not independent s c and Xit includes all the variables in Xit . income and characteristics in 1983 and 1989. 3. First.2) by OLS for all of the sample after substituting γ2 for γ2 for the fecund population ˆ and 0 for the other households. Then I estimate the equation (3.where ∗ ∆CHILDit = 1 if ∆CHILDit > 0 = 0 otherwise. where η0 .3 Data The data set used for estimation is the 1983 and 1989 panel of the SCF.

where the ﬁrst includes liquid assets (checking assets. individual retirement accounts. The ﬁrst saving measure. other real estate. bonds. and 361 of them were reinterviewed in 1989. 7 52 . Total liabilities include mortgage debt. business equity. 103 households and 1.7 Household saving is derived as a ﬁrst diﬀerence in net worth between 1983-89. This information could be used to exclude both realized and unrealized capital gains. The 1989 SCF also asked households to report major changes in asset holdings since 1983. Net worth (NWORTH) is the total value of household’s assets minus its total liabilities. a list sample was drawn from tax information provided by International Revenue Service. An oversample of 438 high-income households came from this list in 1983. stocks. balances outstanding on lines of credit and loans on consumer durables. which makes it diﬃcult to distinguish between active and passive saving. home equity. loans. call accounts. cash value of life insurance and the later includes residential property. vehicles and other real assets like art and precious metals. credit card debt. 497 of them were reinterviewed in 1989. In addition to a standard multi-stage area probability sample. automobile loans. trusts.sample of 4. which will be called SAVE1. other loans for property. Total assets is the sum of ﬁnancial assets and nonﬁnancial assets. See Kennickell and Starr-McCluer [37] for a general description of the 1983-89 panel. substantial inconsistencies are observed between reported net investments in assets and measured changes in holdings. saving accounts. money market deposit accounts. includes capital gains. mutual funds. certiﬁcates of deposit and saving accounts). The 1983 SCF consists of a dual sample. However. Keogh accounts. and this amount is divided by six to get the annual household saving.

The inconsistency seems to be lower for home purchases (Kennickell and StarrMcCluer [38]). To remove the predictable component of income growth. 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. and 1985 are drawn from the 1986 wave of SCF which was conducted with a large subset of 1983 respondents using a shorter questionnaire. The ﬁrst measure assumes that households have knowledge about their future income and expect their income to change over time as household characteristics change. year dummies. 1986. ‘In [the preceding calendar year] how much was the total income you (and your family living here) received from all sources. household demographic variables and age-interaction terms. Using the panel dimension of income observations in the data. 103 households in the 1983 SCF. 1987 and 1988 are drawn from the 1983-1989 panel. I kept the value of the primary residence constant. education. before taxes and other deductions were made?’ Income of the households for 1983. The precautionary saving model predicts that income risk regarding capital income might have a diﬀerent eﬀect 53 . I regress log income on age. To exclude the capital gains. All values are converted to 1989 dollars using the Consumer Price Index Research Series Using Current Methods(CPI-U-RS).8 Income values for 1982. dummies representing asset holdings in 1983. The income measure comes from the question. 822 were reinterviewed in 1986 using a shorter questionnaire. 8 9 Income uncertainty at- Of the 4. 2. 1984. 9 The income measure includes both capital and non-capital income.

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. 10 Female labor supply decisions are correlated with household fertility decisions. which is not reported in this chapter. Dummies representing the amount of assets that households hold by 1983 are included in the regression to control for this eﬀect. As pointed out in Lusardi [44] and Browning and Lusardi [6]. The mean of the reported income over the 1982-88 period (MEANINC) is also used as another measure of income.tributed to each household is equal to the variance of residual log income (VRLI) for the 1982-88 period. 1986 and 1989. Not excluding such expected changes biases this VLI measure of uncertainty upward. In addition. is the coefﬁcient of variation of log income. However. variability measures like VLI and VRLI might be poor proxies for uncertainty. Most studies use instrumental variables for the uncertainty proxy using information on occupation. The second measure of uncertainty is the variance of log income for the 1982-89 period (VLI). 11 Another income variability measure. using instrumental variable estimators is not useful when the ﬁrst stage instruments are poor. Therefore. 54 . However. The empirical results hold true for this measure too. education and industry. I control for the employment status of the spouses and female heads in the earnings regression. while transitory income (TRANSINC) is the mean of residuals from the earnings equation.11 This measure assumes households have no information to forecast future income aside from their current income. Unfortunately. ﬁnding an appropriate instrument on household saving behavior than that of earnings. this information is only available for 1983. households probably expect their income to change over time and know when some of these changes will happen.10 Household permanent income (PERINC) is deﬁned as the mean of predicted income over the seven year period.

A household is only included in the analysis if it remained intact between 1983 and 1989 (i. The sample selection criteria for the sample are as follows.) This eliminates the income variability or net worth change caused by family separation or family creation..180 households. this exclusion or a similar one is necessary when working with means which are aﬀected by outliers.2 illustrates the composition of the sample in detail. 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 $600.13 Table 3. I use VRL and VRLI without an instrumental variable estimator. However. 035 households with the heads between the age of 22 and 88 in 1983.12 To calculate an accurate measure of income uncertainty. 000 is somewhat arbitrary.e. The variable ∆CHILD indiThe cut-oﬀ net worth of $10 million and saving of $600.1. Of the remaining 1. All variables are described in detail in Appendix B. those households with more than three missing or non-positive income values are dropped. 12 55 .to exclude for identiﬁcation is problematic. The ﬁnal sample consists of 1. separation or the death of either head or spouse are excluded. 299 households out of 1. See Kennickell and Starr-McCluer [37] for details. divorce.479 experienced a major change in family composition and were dropped from the sample. 84 were dropped because of outlying net worth or saving values and 66 were dropped because of missing income values. 13 The sample design in 1983 speciﬁcally excluded households with the heads under the age of 22. households that experienced a change in composition such as marriage. In the panel 1983-89 SCF. 000. Therefore.

fecund households are faced with higher income uncertainty than the rest of the sample.611 in 1983. The average net worth for households with an additional child is $82. which is $37. Also. Fecund households are headed by younger persons. 18. mostly married (89.2 provides the variable means by household fertility of the fecund households.179 less than the mean net worth of the rest of the fecund houseOnly 3.are plausible: households with an additional child are younger. 14 56 . but had higher income between 1983 and 1989. ∆CHILD = 1 if the household experienced at least one birth of a child.6 percent of the fecund households had a child between 1983 and 1989.0 percent had three. i. According to the SCF data.1 percent). and saved more compared to the other households in the sample.3 percent of the families experienced more than one birth during that time period-2. respectively. had less net worth in 1983. Among fecund households. comparisons across the two groups of 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 . Columns (1) and (2) provide the variable means and standard deviations of all of the households in the sample and the fecund households.3 percent had two children and 1. 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.cates the fertility of the household between 1983 and 1989. Therefore. I use a probit model and a dummy variable to indicate the fertility choice instead of using a count data model.e..14 I refer to the households that had a child as households with an additional child. Columns (3) and (4) of Table 3.

3. we observe that households who had a child are faced with lower income uncertainty (0. they saved $11. from 67. 000 and above $60. 648 and $6. Uncertainty estimates are greater for households with mean income below $10. the increase is insigniﬁcant.holds. When households are grouped by SAVE1. 690. Households in the bottom 25 and top 10 percent of the SAVE2 distribution face higher income variability than the rest of sample. 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.132 versus 0.0 percent in 1983 to 72. households with an additional child saved more than the rest of the fecund sample. This suggests that households at the tails of the income distribution face higher uncertainty. respectively. 170 and $8. when we compare the income uncertainty of the two groups. the bottom 25 percent of the distribution faces a lower income variability than the households in the 25-50 percent of 57 . The measures of income uncertainty by household characteristics are given in Table 3. On the other hand.7 percent in 1983 and rose to 77. 000. The homeownership proportion for the rest of the fecund sample is higher in 1983 but compared to the households with an additional child. 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. 462. The homeownership proportion among households with an additional child was 53.5 in 1989.191).8 percent in 1989. while fecund households without an additional child saved $7. According to SAVE1 and SAVE2. Also.

and their permanent income is higher. regardless of how savings were measured. income uncertainty is lower except the top 10 percent of the distribution. Diﬀerence between the savings of households with and without an additional child increase as the age of the household head increases.5 shows the results of the probit analysis of the fertility de- cision of the fecund sample. Households who had a child between 1983-89 are diﬀerent from other households in terms of their saving. Considering the income uncertainty. versus 16 percent of the households with heads between age 31-40. 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. 0 otherwise. For other SAVE1 groups. 3. households with young and middle age heads that had a child face lower income variability. for whom it reaches its highest value. income and income variability. 58 . Almost 36 percent of the households with heads below age 31 in 1983 had a child during the following six year period. regardless of the uncertainty measure. Households that had a child save more. The right-hand variables include factors that are expected to aﬀect the demand for a child. When grouped according to the number of children. Table 3.4 represents household saving. the estimates of income uncertainty decrease as the number of children living in household in 1983 increases.4 Estimation and Results Table 3.the SAVE1 distribution. and 1 percent among the age 40 and above group.

5 show that other things being equal. PERMINC and TRANSINC). The analysis in column (1) uses VRLI as the income uncertainty measure and permanent and transitory income as the income measures. race of the household head (WHITE). The signs of the age interaction terms imply that older homeowners are less likely to have a child.1 increase in VRLI and VRL decreases the probability of having a child by 0. middle (MIDDCH) and older (HIGHSCH) children in 1983 and the interaction terms for age (AGE83×HOWN83 and AGE×YOUNGCH). The coeﬃcient of age is highly signiﬁcant and negative. 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.6 percent. number of adults living in the household (NADULT). column (3) uses VRLI and mean income. respectively. age (AGE). marital status (MARRIED). indicating that being one year older reduces the probability of having another child by 1 percent. homeownership in 1983 (HOWN83). A married household is 8 to 10 percent more 59 . 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. a dummy indicating whether spouse works full time at paid employment in 1983 (SPFULLT). Evaluated at the sample mean values. a 0. a household income measure (MEANINC.namely. an income risk measure (VRLI and VLI). whereas older households with small children are more likely to experience another birth. number of young (YOUNGCH). column (2) uses VLI and mean income and ﬁnally.5 and 0. The results in table 3.

is included as a right-hand variable with other factors that might aﬀect the saving behavior. the number of adults and children living in the household (NADULT and NCHILD). Columns (1)-(3) in tables 3. the change in the number of adults between 1983-1989 (∆NADULT). ∆CHILD.7 use the same income and uncertainty measures as columns (1)-(3) in table 3. Estimates of the saving equations are presented in tables 3.5. age of the head (AGE). 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. a self-described expectation to leave a bequest (BEQUEST83). Finally. a measure of income uncertainty (VRLI and VRL). namely.7 for SAVE1 and SAVE2.likely to have another child. 60 .6 and 3. TRANSINC and MEANINC). a dummy indicating having 1983 net worth in the top 10 percent and bottom 25 percent (NWORTH90 and NWORTH25). However. the probability of having a child seems to increase with income.6 and 3. age interaction terms (AGE×NCHILD and age×∆CHILD) and income uncertainty interaction terms (VRLI (VRL)×NWORTH25 and VRLI (VRL)×NWORTH90). transitory income in column (1) has a negative eﬀect and mean income in column (3) is insigniﬁcant. The predicted probability of having a child. Similarly. in terms of the eﬀect of uncertainty. both permanent income and mean income in columns (1) and (2) are signiﬁcant. the income uncertainty interaction terms show whether or not . compared to households headed by an unmarried person. the behavior of the wealthy and the not wealthy are diﬀerent than the rest of the population. income (PERMINC.

The results for two measures of savings are quite similar (SAVE1 in Table 3. The results in Table 3. Having 1983 net worth in the top 10 percent is associated with higher levels of SAVE1 and SAVE2 in all speciﬁcations. households in the top 10 percent of the wealth distribution save almost $11. which is 0.162.6 and SAVE 2 in Table 3.162 save about $15.7 do not the support the idea that households save a higher fraction of transitory income. However. Saving also increases with income.7).6 and Table 3. For example.000 more than the rest of the sample. let us look at the eﬀect of the number of adults living in the household. around $7.447. Before we examine the eﬀect of children on savings.34.6. Changes in the number of adults between 1983 61 .6 show that households in the top 10 percent of the wealth distribution and with VRLI of 0. respectively. regardless of the measure. 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.24 in column (1) of Table 3. Both SAVE1 and SAVE2 reduce with the number of adults living in the household. the results in Table 3. and it is signiﬁcantly lower than the estimated propensity to save out of permanent income. evaluated at the sample average of VRLI. which is 0.132-$8. The estimated coeﬃcient of the propensity to save out of transitory income is 0.500 less than the rest of the population whereas households in the bottom 25 percent of the wealth distribution save $3.500 less than the rest of the population as a result of an increase in income uncertainty.

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. For this.and 1989. Having an additional child reduces savings. age does not aﬀect the savings behavior of those without children. The same is true for the number of children living in the household. Households with children save less when the household head is below age 35 and save more above that age. That is another impact of children on household savings. households expecting to leave a bequest save signiﬁcantly more (around $12. Also.6 and 3. the sample is restricted to only fecund households. Controlling for the number of children already living in the household. we observe that the eﬀects of the children and age interaction terms decrease but do not disappear.7. however.555-$12. This result highlights the importance of the interaction between household composition and the age of the household head. do not aﬀect SAVE1 but appear to reduce SAVE2. 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. When we control for permanent income as in column (1) of Tables 3.796 more) than household that do not expect to leave a bequest. and the fertility decision is modeled as an endoge- 62 . however being one year older and having an additional child increases savings.

implying that younger households save less whereas older 15 See Maddala [45] for the models with self-selectivity. Finally.nous switching model. average SAVE1 of the households that did not have a child is around $12. depends on the age of the household head.15 The results are given in Table 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.695-13. changes in the number of children and children already living in the household reveal a signiﬁcant eﬀect on household savings. Overall. even after controlling for several demographic characteristics. The results show that households would have saved around $2. 3.6. The empirical results suggest that income uncertainty directly aﬀects the probability of having a child. The direction of the response. This ﬁnding suggests that the overall eﬀect of children on household saving is negative. I take into account the fact that fertility decisions are endogenous to household saving decisions.133 according to the results of the three regressions in Tables 3. however.066 less if they had chosen to have a child.297-4. 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. In estimating this eﬀect.8. 63 .

the age eﬀect on savings disappears. After controlling for the number of children living in the household and the expectation of leaving a bequest. At the same time. The main ﬁnding of this chapter is consistent with the life-cycle theory of saving and consumption. 64 .households save more with an increase in the number of children. Household composition is an important factor of life-cycle savings. the ﬁndings are not consistent with the predictions of the precautionary saving model that agents faced with uncertainty about future income increase their savings.

Table 3.111 0. Notes: The table reports the proportion of households citing the selected motives as the most important reason for saving as ‘rainy days’.017 0.052 0.383 0.326 0.1: Saving Motives by Age Groups. 65 .273 0.016 0.176 0.041 Children 0. population as a whole.000 0.250 0.004 0. 1983 All By Age Below 31 31-40 41-50 51-60 61-70 70 and over Rainy Days Retirement Home 0.230 0. retirement.S. buying home and education of children respectively.192 0.011 0.206 0.122 0. Number of observations: 1035. Observations are weighted to reﬂect the U.345 0.289 0.000 Source: Survey of Consumer Finances.047 0.047 0.065 0.362 0.010 0.323 0. 1983-1989.117 0.057 0.

189 38.9 0.1 0.725 0.1.767 1.516 2.112 2.456 0.791 1.334 0.197 ∆CHILD = 1 11170 8690 38852 41210 82611 30. All dollar values are in 1989 dollars.001 0.490 0.460 0.437 0.537 0.6 13.2: 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 45.556 0.487 0.132 0.938 0.372 0.302 0.645 0.092 2.135 0.778 0.845 0.120 0.670 0.537 0.169 Fecund HH ∆CHILD = 0 8282 7648 6868 6462 43109 44122 40171 39921 112861 119790 36.151 N 1035 509 422 87 Note: ∆CHILD=1 if the household had a child between 1983 and 1989 (0 otherwise).4 0.795 0.4 13.624 0.652 0.780 0.180 0.246 0.1 12.162 0.191 0.747 0.186 2.672 0.788 0.Table 3.407 0.424 0.8 12.297 0.7 0.055 0.725 0.734 0. Observations are weighted using the sample weights. 66 . All variables are described in Appendix B.891 0. The table reports means of the variables.289 0.

078)-1.1794) Above $30.1832 (0.1194 (0.10.3234 (0.2449) (0.1527 (0.0902 (0.2642) $30.0 0.0 0.0 0.1095 0.9431) (0.0 0.2281 (0.2738) (0.1716 (0.7517 25.1330 0.000-59.3524) (0.818 10.2299 0.1912 0.492 15.725 25.2740) (0.2290 0.Table 3.1451 0.2458) 0.7 0.2 0.1479 (0.1996) (0.1284 (0.0 0. and VLI is the variance of log income.0 0.5066) 1 Child 17.000 12.3333) (0.446 15.2330 (0.999 36.126-24.3230) $127.1436 0.078) 25.1269 (0.1715 (0.000 14.2086) Above $314.3980) Above $24.233-12.0 0. Observations are weighted using the sample weights (N=1305).1296 (0.5530) NCHILD No Children 55.1 0.3: Mean Income Uncertainty by Household Demographics % HH VRLI All 100 0.1808) (0.5537) $ 1.492 10.2013 0.6129) (-$739)-1.426) MEANINC Below $10.1312 (0.4963) 0.518-314.3279) SAVE1 Below (-$1.1707 (0.000-29.2825) (0.6504) $10.1468 0.169 (0.0 0.5836) (0.9087) NWORTH Below $10.4940) (0.1363 (0.1056 0.2274) (-$1.0 0.1 0.0988 (0.1855 (0.2713 (0.232 25.818 15.0 0.2134 0.125 25.3362 0.2973) Note: Standard deviations are given in parentheses.6786) (0.446 10.5512) SAVE2 Below (-$739) 25.1803 0.0 0.265-52.489 25.2117 (0.5245) 0.056 25.2579) $7.2269) (0.4881) (0.0 0.0998 0.2371) $1. All variables are deﬁned in Appendix B.4780) $ 10.1462 (0.1889 (0.1559 0.4092) (0.0 0.2171) 2 and more 27.2374 (0.1027 0.1184 0.2 0.2920 0.999 37.7 0.265 25.6357) (0. VRLI is the variance of residual log income.4232) $10.2210) (0.0 0.2657) Above $60.2391 (0.057-30.433) 0. 67 .726.162 (0.0 0.1088 (0.490-7.0977 (0.3376) VLI 0.3334) $52.0 0.1.4472) (0.

1 4.2376 VLI 0. All variables are deﬁned in Appendix B.912 0.619 3.220 34.8 10.769 0.3 8.1774 0.1369 0.0812 0.1727 3.5 24.812 6.1507 20.049 5.1408 0.628 0.477 40.5 4.390 52.884 36.331 23. and VLI is the variance of log income. 68 .9 11.Table 3.272 9.257 43.422 0.2261 Note: ∆CHILD=1 if household had a child between 1983-1989 (0 otherwise). VRLI is the variance of residual log income.3064 0.899 0.4: Savings.1.1839 0.528 4.2920 6.636 27. 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 12.0841 56.487 0.

060 -160.021** -0.953** 0.331 HIGHSCH -0.006 TRANSINC/1000 -0.019** 0.208** 0.020** -0.565 1.062 -160.627** 0.385** 0. Marginal eﬀects are given in the brackets.229 -0.0553] [-0.0099] [-.397 0.073 SPFULLT -0.130 0.418 0.175** 0.3340] [-0. and HAGE is HOWN83×AGE.203** (1) Coef StdE 1.886** 0.0001] [ 0.35 0.448 0.389 0.024** 0.1040] [-0.178** 0.410 0.998 -0.0577] (3) Coef StdE 1.420 YAGE 0.0001] [ 0.369 [-0.0675] -0.131 0.208** 0.Table 3.060 -2.0541] -0.154** 0.020** [-.063 0.392** 0.0625] -0.31 0.5: Probit: Fertility Decision of Fecund Households (2) Coef StdE 1.130** 0.232 HAGE -0.31 0.2375] -2.623** 0. and * indicates signiﬁcance at 10 percent level.566 [-0.14 0.0594] 69 CONSTANT AGE VLRI VLI PERMINC/1000 0. Number of observations N=509.0845] [-0.132** 0.166** 0.627** 0.060 [-0.077 0.368 -0.0612] [0.0095] [-.027** 0.019** 0.543 0.0550] [-0.134 0.0613] 0.068 YOUNGCH -1.1297] [ 0.047 [-0.236 [-0.844 MIDDCH -0.366 -0.369 -0.228 WHITE -0.1038] [-0.001 1. .714 NADULTS 0.409 0.1041] [-0.001 MEANINC/1000 MARRIED 1.980 -0.720* -0.0426] -0.001 1.357 0.001** 0.024** Note: Coef reports coeﬃcients and StdE reports standard errors.024** 0.225** [-.717* -0.0844] [-0.749** -0.768 0.384** 0.186** [-.0786] [-0.225** 0.0920] 1.886** 0.001* [ 0.000* 0.564 HOWN83 2.0829] [-0.3338] [-0.00 0.130** 0.1037] [-0.063 0. ** indicates signiﬁcance at 5 percent level. YAGE is YOUNGCH×AGE.154** 0.049 Likelihood -152.0787] [-0.000 0.20 Pseudo R2 0.0094] [-.545 0.175** 0.047 -0.0008] [-.

Number of observations=1.035.Table 3. .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 * .22 257 53 -7244 3908 -24818 11791 707 319 12952 5786 -7845 5112 . ** indicates signiﬁcance at 5 percent level. and * indicates signiﬁcance at 10 percent level.22 ** ** ** ** ** Note: Coef reports coeﬃcients and StdE reports standard errors.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 .

Number of observations=1. ** indicates signiﬁcance at 5 percent level.18 223 57 -8264 3929 -24089 11699 686 319 11736 5772 -10074 5321 .Table 3.035.18 -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 * . .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 .18 Note: Coef reports coeﬃcients and StdE reports standard errors. and * indicates signiﬁcance at 10 percent level.

133 12.375 422 422 422 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.154 10.8: 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) 13.672 8.Table 3.695 12.527 10. 72 .

First. Of those contributing to their children’s college costs.000) it was 98 percent (Presley and Clery [47]). about 65 percent reported using some previous savings. According to the 1996 National Postsecondary Student Aid Survey (NPSAS). Gale and Scholz [23] estimate that the annual ﬂow of parental 73 .Chapter 4 Saving for Children’s College Education 4.900 (Choy and Henke [14]). 90 percent of dependent undergraduate’s parents contributed to their children’s college costs. 65 percent of the parents contributed a positive amount to their children’s college costs as a gift. and 80 percent reported using some current income. parents contribute a signiﬁcant amount to their children’s college costs. and the average amount of their support was about $3. for those in the higher income group (income above $70.1 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.000). Using the 1983-86 SCF. While the percentage was lower for those in the lower income group (income below $35. According to the 1987 NPSAS.

which is 12 percent of the aggregate net worth in 1983. However. Using alternate but also plausible assumptions. Using the data on actual expenditures on children’s college education. 74 . the focus has been on calculating the ﬁnancial aid tax and measuring its negative impact on household asset accumulation. as shown in Long [43]. According to Edlin [19] and Feldstein [22].441. the ﬁnancial aid tax rate on capital income can be as high as 50 percent. Gale and Scholz [23] convert the ﬂow of college support to a stock of wealth using steady-state assumptions. Dick and Edlin [16] and Long [43] have recently examined the adverse eﬀect of the means-tested student aid process on household asset accumulation. families who save for college reduce their eligibility for ﬁnancial aid. Second. According to their estimation. Dick and Edlin [16] 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. Long [43] ﬁnds that the eﬀect of the ﬁnancial aid tax on asset holdings is smaller than the eﬀect in the prior literature. The college ﬁnancial aid system imposes an implicit tax on the savings of households that are potentially eligible for ﬁnancial assistance.5 billion. anticipated college costs and the amount of aid that is received and so on. this chapter examines the eﬀect of anticipated educational expenses on household savings. To date. Feldstein [22]. contributions to children’s education yield a wealth of $1.contributions totaled about $35 billion. Edlin [19]. the results in Edlin [19] and Feldstein [22] depend on a variety of assumptions such as the number of children enrolled in college.

they ﬁnd an inverse relationship between family size and children’s schooling. diﬀerent forms of parental expenditure such as children’s schooling. they analyze the inﬂuence of size and ordinal position of siblings on the like- 75 . The results of his model conﬁrm that investments in children’s human capital. In the empirical investigation of this model. Tomes [53] empirically tests whether parental bequests of wealth and human capital investments represent substitute forms of parental transfer. [3] develop a model relating children’s schooling to family size. child care and bequests have been used as the qualitative measure. the quality-quantity model of fertility behavior assumes that parents have preferences both for the expenditure per child and the number of children. and test predictions of their model using the veterans sample of white male twins and the sample of their adult oﬀspring. Speciﬁcally.Third. which are measured by children’s income and years of schooling. with and without equal access to ﬁnancing for education. Behrman et al. Without unequal access to schooling. The analyses in Willis [55] and Becker and Lewis [2] show that parents with few children have substituted quality for quantity. Using the National Longitudinal Survey of the High School Class of 1972. Steelman and Powell [51] investigate the relationship between the structure of the sibling group and parental ﬁnancial support for children’s college education. The estimates in Tomes [53] conﬁrm the prediction of the quantity-quality model that bequests and children’s income are negatively related to family size. are negatively related to subsequent levels of inheritance. The estimates in Tomes [54] show that family size and children’s schooling are jointly determined.

emergencies.2 In addition.1 Given the rapidly rising cost of college tuition. ordinal position alters parental support in favor of later-born children. 2 See Browning and Lusardi [6] for a survey of the literature. using Japanese household data.1 percent of gross saving. Steelman and Powell [51] argue that later-born children are more favored relative to earlier-born ones due to the family life cycle. Their ﬁndings also show that the importance of each saving motive depends on the age and the life-cycle stage of the household. Horioka and Watanabe [29] analyze the amount of gross saving and dissaving for each of twelve motives including saving for retirement. an analysis of ﬁnancing college education and family size highlights an important aspect of the quality-quantity model. saving for ‘rainy days’ and saving for bequests and inter vivos transfers. 1 76 . respectively. The results of their analysis show that retirement and precautionary motives account for 25. Saving for children’s education is the third most important saving motive after saving for retirement and ‘rainy days’ and accounts for 9. bequests. It would be of interest to investigate this eﬀect on the level of parental support using the information on household savings. 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. The data set used in the chapter does not provide information on the ordinal position of the child attending college.7 and 28. Moreover. education and so on. Parents have more resources when later-born children reach college age.2 percent of gross saving.lihood and amount of parental support. A number of studies have analyzed motives for saving such as saving for retirement.

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. the motive of saving for children’s education has not been much investigated.’ is the most cited reason. saving for ‘rainy days. Table 4. Among the households saving for retirement. While 35.’ home purchase and children’s education. income ﬂuctuations and bequests have motivated substantial research. medical and dental expenses. 77 .3).5 percent of households list ‘rainy days’ as the most important reason for saving.3 percent list retirement and 5.3 percent list education as the most important reason for saving. The sample includes households with nonretired heads and spouses (The SCF and restrictions on the sample are discussed in Section 4. One exception is Souleles [49]. Using the Consumer Expenditure Survey. taking vacations and so on. The table provides the responses of the sample used in this chapter. The last column of Table 4. 15. ‘rainy days. buying a home and other reasons as the most important reason for saving. ‘rainy days’ (emergencies and unemployment). education of children.1 shows the percentage of households in the 1983 survey citing retirement. Souleles [49] examines consumption of households as they pay for the college expenses of their children. His ﬁndings are consistent with the life-cycle theory of consumption and saving. and buying durable household goods.Although saving for retirement.1 shows the percentage of households reporting that they cannot or do not save. The SCF contains a question that asks the household’s most important reason for saving. Other reasons for saving include saving for ordinary living expenses.

For example. and the percentage of households citing retirement as the most important reason increases.1 also shows the percentage of households citing each saving motive by the number of children and net worth in 1983.8 percent).The percentage of households saving for ‘rainy days.4 percent in the top 25 percentile report saving for retirement.3 percent vs. while only 2. 24.’ retirement and other reasons show a systematic trend relative to the total number of children. As the number of children increases. Among the households in the bottom 25 percentile of the wealth distribution. This table shows that the number of 78 .7 percent of those in bottom 25 percentile of wealth distribution report saving for retirement. the percentage of households saving for retirement increases with wealth. among households with 1 or 2 children. Table 4. the percentage of households citing ‘rainy days’ and other reasons as the most important reason decreases. Among the households in the higher wealth groups. the eﬀect of the number of children on the percentage of households reporting saving for children’s education disappears. 5. Controlling for the number of 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. 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. 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.

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.children has a signiﬁcant eﬀect on saving motives. and they save in advance for these expenses. Households with higher income and wealth expect to have higher educational expenses. The data from the 1983-86 SCF is used to estimate two equations in which the dependent variables are household savings and educational expenses. Further. Using the actual college expenses reported in the SCF. the empirical ﬁndings provide an answer to why saving is concentrated among wealthier households. a household with a 43 year old head expecting to have $2. We continue to observe this eﬀect even after controlling for the household wealth. I also obtain predictions concerning the simultaneous determination of family size and college expenditures per child. Other things constant.000 more than it would had it not expected to have any college expenses. Section 4.2 an79 . 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. Also. The remainder of this chapter is organized as follows. 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.000 in children’s college expenses saves $8. the eﬀect of anticipated educational expenses on household savings are estimated. households save for their children’s college expenditures. In this chapter. and the amount of savings increases with the age of the household head.

3) (4. 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.5 estimates the determinants of college expenditures and uses these estimates to investigate the eﬀect of expected college expenditures on household savings.alyzes a model of the quality-quantity interaction of fertility with household savings.2 A Model of Saving for College This section considers a world in which individuals (parents) live for two periods. per capita college investment is assumed to be equal for all n children. In the ﬁrst period.6. a summary and conclusions are presented in Section 4. second-period consumption. Section 4. 4. Parents choose ﬁrst-period consumption. and the number of children to maximize U = U (c1 . In the second period.3 describes the 1983-86 SCF. Section 4. a couple earns y1 .4 provides a framework for the empirical analysis of the interaction between savings and college expenditures. investment to each child’s education. chooses to have n children. and the family consumes together c1 and saves A to earn interest at the rate of r. Finally.2) (4. Section 4.1) . For simplicity. c2 . e. n) subject to c1 = y1 − A c2 = y2 + (1 + r)A − πen 80 (4.

7) where U1 and U2 are the marginal utility of consumption in the ﬁrst and second periods.where π is the price of education. e.1) yields the following unconstrained maximization problem: U = U (y1 − A. y2 + (1 + r)A − πen. The ﬁrst-order conditions are −U1 + (1 + r)U2 = 0 −πnU2 + Ue = 0 −πeU2 + Un = 0 (4. which results in an increase in accumulated assets. educational expenses (e) and the number of children (n). n) (4. If the utility function is CES with equal elasticity of substitution between all arguments. and Un is the marginal utility of family size. Ue is the marginal utility of children’s education. a decrease in second-period consumption is likely to decrease the ﬁrst-period consumption.3) into (4. Substituting (4. This expression implies that an increase in educational expenses decreases the second-period consumption relative to ﬁrst-period consumption. respectively.6) (4.5) (4.2) and (4.4) where the three choice variables are accumulated assets (A).8) where γ is the elasticity of substitution. 81 . equation (4. Since the right-hand side is a constant. y2 + (1 + r)A − πen (4.5) can be written as follows: 1 y1 − A = (1 + r) γ−1 .

3 82 . This interdependence implies an inverse relationship between the number of children and educational expenses. 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 (4.7). then U2 is a convex function. E1 [U2 ] exceeds U2 [E1 ]. If the third derivative 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.3 The combination of a positive third derivative of the utility function and uncertainty about future income reduces consumption in the ﬁrst period. 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.To extend the analysis to account for uncertainty.6) and (4. let us assume that the second period wage income y2 is stochastic. 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. When uncertainty about future income is assumed. household saving can be associated with two diﬀerent saving motives: saving for uncertainty about future income (precautionary saving) and saving for children’s education.

This variable includes children of previous marriages living with former spouses. college expenditure. 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. Unfortunately. the data does not diﬀerentiate between children away in college or living on their own and with former spouses. SAVE1. In 1986. 4 83 . The SCF contains detailed information on household assets.822 of these households were reinterviewed. The respondents were also asked how many years of college their children completed from 1983-85. The variables used in the empirical analysis are classiﬁed into four groups: fertility. 2.4 The college expenditure variable (COLLEXP) captures the quality dimension associated with the expenditure per child. savings and other control variables. income and demographic characteristics. The 1983 survey contains interviews from a random sample of 3. The fertility variable (CHILD) is the number of children of either the respondent or spouse.3 Data The empirical analysis uses data from the 1983-1986 SCF.4. Household savings are measured in two ways. including those not living in the household. The college expenditure variable is the outlay of college education per child. The ﬁrst measure. In 1986.824 households and a high-income supplement of 438 households. liabilities. I use the number of children attending college and the number of years they attended to normalize college expenditures.

I estimate household permanent and transitory income. education. where the ﬁrst includes liquid assets (checking assets. vehicles and other real assets like art and precious metals. In order to exclude unrealized capital gains on the primary residence. trusts. reasons for borrowing and saving. educational expenditures and fertility decisions. Net worth (NWORTH) is the total value of household’s assets minus its total liabilities. race. individual retirement accounts. and the educational level of the spouse. saving accounts. Total liabilities include mortgage debt. Transitory income (TRINC) Total assets is the sum of ﬁnancial assets and nonﬁnancial assets.is the change in net worth between 1983 and 1986 divided by the number of years. business equity. Other controls include variables that aﬀect savings. gender and the educational level of the household head. Using the reported household income for 1982.5 SAVE1 includes the realized and unrealized capital gains. mutual funds. stocks. and the demographic characteristics associated with tastes (urban residence. automobile loans. bonds. loans. balances outstanding on lines of credit and loans on consumer durables. gender of the household head and other household characteristics. other real estate. race. the value of the primary residence in 1983 is kept constant. 5 84 . other loans for property. cash value of life insurance and the later includes residential property. certiﬁcates of deposit and saving accounts). These are age. credit card debt. marital status. money market deposit accounts. a second measure of savings (SAVE2) is used. 1983. Whenever a household did not buy or sell a house that was the family’s primary residence. home equity. Household permanent income (PERINC) is deﬁned as the predicted income in 1985 obtained from regressing the log of total income on age. call accounts. Keogh accounts. 1984 and 1985. and whether or not the household head is willing to undertake risky investments).

806 and according to second measure.575 in 1986 dollars. Table 4. respectively. households with family income above $100.is the diﬀerence between reported income in 1985 and estimated permanent income.690 households.3 presents average household savings and college expenses by 85 . For households with nonzero college expenditures.931 and $3. The average household net worth in 1983 is $81.005. The sample is restricted to families that did not change composition from 1983-86.296. Appendix C.1 gives a detailed deﬁnition of the variables used in the estimation of the model. The head of the median household reports that it is all right to borrow money for educational expenses. Estimating the relationship between savings and educational expenditures is complicated for families who experienced a major change in composition such as marriage and divorce. Permanent and transitory incomes in 1985 are $25.2 presents summary statistics of the variables used.000 are excluded to avoid the diﬃculty of modeling the relationship between educational expenditures and savings. Households with retired household heads are assumed to be in the life-cycle stage of dissaving. Table 4. it saves $4. the typical household saves $5. The average household in the sample is headed by a forty two year old married high school graduate and includes two children. These restrictions leave us with a sample containing 1.811. Also. the average expenditure is $2. According to the ﬁrst measure of savings. The sample is also constrained to include only the households with nonretired household heads and their spouses if the head is married.

25-75 percentile and top 25 percentile) spend less per child as the number of children attending college increases. college expenditures per child decreases. 4. Except the households in the bottom 25 percentile of the net worth distribution with two or more children attending college.3 also breaks down savings and college expenses by the number of children in college and net worth in 1983. Households in all three wealth groups (bottom 25 percentile. However.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 (4.10) .the number of children attending college. Table 4. 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. However. The data show that households continue to save while children are in college. As the number of children in college increases. The data show that college expenses increase with net worth. household savings increase with the number of children in college.077. Savings of households with children in college increase with net worth.9) (4. household savings increase with the number of children in college. more than twice as much the households in the same wealth group with one child in college.

e.where x1i and x2i are the vectors of exogenous variables. The empirical results hold true for this measure of fertility too. i. The theoretical model derives predictions concerning the eﬀect of the completed lifetime fertility on the educational expenses. and κ1 and κ2 are the vectors of parameters to be estimated. is obtained to estimate the expected educational expenses.e. u2i ) are assumed to be randomly drawn from a 2-variable distribution with E(ui ) = 0 and E(ui ui ) = . η2 > 0. The expected completed family size is given by E[n] = exp(x3i κ3 + φi ) (4. However. i. Therefore. the data on household fertility gives the number of children ever born to a household headed by a person of a certain age.11) where x3i is a vector of demographic characteristics. and φi is an age speciﬁc factor. the completed fertility. n. κ3 is a vector of parameters. The model predicts that an increase in the number of children decreases the anticipated and actual educational expenditure. Another prediction of the model is that educational expenses increases household savings. δ1 < 0. 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 structural disturbances ui = (u1i .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. 6 87 .

4. I estimate a Tobit model for the educational expenditures of the households with children attending college. a dummy indicating whether the spouse works for a full time job in 1983 (FSPOUSE).4 are consistent with previous studies. race (BLACK) and the education of the household head (HIGHSCH and COLLEG).5 Estimation and Results Table 4. Controlling for permanent income. However. Estimates of the coeﬃcients in Table 4. Then I use the estimates of those parameters to construct the proﬁle of anticipated educational expenses. Then e∗ is observed to be ei if e∗ > 0 and gi = 1. 88 . gi = 0 indicate that none of the children are attending college. First. The right-hand variables include household demographics expected to aﬀect the number of children: namely. permanent income (PERINC). An increase in the permanent income increases the number of children. gender (FEMALE). households headed by high school and college graduates have fewer children than those headed by persons without a high school degree. and a dummy indicating whether the household does not live in a SMSA area (NSMSA).on ﬁnancing her education. age (AGE).4 contains estimates of the Poisson regression model of the fertility equation. Married households have more children. and education of the spouse (HIGHSCHSP and COLLEGSP). I obtain expected i i educational expenses as follows. martial status (MARRIED). Let gi = 1 indicate that the household has a child attending college.

9). Households with children attending college between 1983-86 are included in the estimation of the Tobit regression. 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.03.5 reports estimates of the equation (4. and 252 reported contributing a positive amount to their children’s college expenses. SCHEDUC and SHOME). The instrumental estimate of the coeﬃcient on the number of children is almost three times as large as the OLS estimate (-$459 vs.controlling for marital status. 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 . As predicted by the quantity-quality model. SEMERG. The average CHILD is 3. and permanent and transitory income (PERINC and TRINC). the amount of college expenditure decreases with the number of children. Of the 1. namely. 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. The right-hand variables also include other factors that might aﬀect the college expenditures. I use the estimates of the regression to predict the completed household fertility when the household head is 55 years old (CHILD). 338 had a child attending college between 1983-86. -$187). households with spouses working full-time and with high school and college degrees have fewer children. Table 4.690 households in the sample.

an additional child results in a drop of $317 in expected college expenditures at the mean of values.variables as follows: ˆ ˆ δ1 ∗ Φ((δ1 ni + x1i κ1 )/ˆ ). Estimates in Table 4. Households with heads who believe that it is all right to borrow for educational expenses have higher expenditures. CHILD. the average contribution of the top 25 percentile is $3. The last two columns of Table 4.6 show SAVE1 and SAVE2 for households with 90 .6 presents actual and estimated college expenses by household net worth in 1983. 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.789 per child. ˆ σ (4. ˆ Using the approximation. Households citing saving for retirement and buying a home as the most important reason for saving spend less on children’s education. respectively.5 show that increases in permanent and transitory income increase the level of expenditures for educational expenses. While the average contribution of households in the bottom 25 percentile of wealth distribution is $1. and δ1 and κ1 are the estimates of δ1 and κ1 . to calculate the expected college expenditures (COLLEXP ). Households citing saving for children’s education as the most important reason for saving spend more than other households. The amount of contribution to children’s college education increases with wealth.093 per child. The average COLLEXP is $1.436. I use estimates of the Tobit model and the expected completed fertility.12) where σ is the estimate of the standard error. Table 4.

Households in the bottom 25 percentile of wealth distribution save signiﬁcantly less than those without children in college.3. nonurban residence (NSMSA) and dummies indicating household net worth in 1983 (NWORTH25 and NWORTH75). Interestingly. households with greater wealth save more if they have a child attending college. Table 4. households in top 25 percentile of the wealth distribution save almost ﬁve times more if they have a child in college. In estimates of both equations.7 presents the eﬀect of expected college expenditures on household savings. permanent and transitory incomes (PERINC and TRINC). two other reasons for saving. which are retirement and emergencies (SRETIRE and SEMERG). a dummy indicating whether the household head is willing to take risky investments (RISKY). However. Similar to Table 4. a dummy indicating whether or not the household had a windfall greater than $3. The estimates of SAVE1 and SAVE2 are very similar. Columns 1 and 2 contain the estimates for SAVE1. the coeﬃcient of expected college expenditure (COLLEXP ) is negative and the coeﬃcient of age interaction term (AGE×COLLEXP ) is positive. indicating that an increase in expected college expenditure raises 91 . the data in Table 4. and the number of children attending college between 1983-86 (NCHCOLL). gender (FEMALE) of the household head. Explanatory variables include age (AGE).and without children in college.000 between 1893-86. and columns 3 and 4 contain the estimates for SAVE2.6 show that wealthier families contribute more to their children’s education and continue to save while their children are in college.

had it not expected to contribute a positive amount. This result does not necessarily mean that households are not saving for children’s college education. However.493 more and households in the top 25 percentile save $11. Also. Figure 4.1 shows the eﬀect of the age of the household head on SAVE1. households with heads who are willing to undertake risky investments save $7. households in the bottom 25 percentile of the wealth distribution save $2. Using the estimates in Table 4.7. showing that households save approximately 39 percent of their transitory income. Finally. the ﬁgure ﬁrst calculates savings of a typical household expecting to contribute $2. Unfortunately. citing a motive other than retirement or emergencies as the most 92 . The eﬀect of transitory income on both measures of savings is positive and signiﬁcant.000 to college expenses and compares it to what it would have saved. Permanent income increases both SAVE1 and SAVE2. household savings are calculated in ﬁve year intervals. Households citing saving for retirement as the most important reason save more.savings after age 28. By typical. I mean a household in the 25-75 percentile of the wealth distribution. the number of children attending college does not signiﬁcantly decrease household savings. the data does not have detailed information on the years that children were attending college between 1983 and 1986. 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 1983.833 more than other households. saving for emergencies does not signiﬁcantly aﬀect savings.398 less than those in the middle of the wealth distribution . Finally. For each age group.

savings decline to zero at the age of 43. The eﬀect of expecting to contribute $2000 on household savings is $8. 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 $4.894.important saving motive. the eﬀect of anticipated college expenses on savings is positive and signiﬁcant. If the household does not expect to contribute to children’s college expenses. this will increase its saving by $4.000 college expenses increase with age. headed by a male. The results in Table 4. for example. The household is assumed to have average permanent and transitory incomes for their age group. and it increases with the age of the household head.6 Conclusion This chapter examines the eﬀect of saving for children’s college edu- cation on household savings.894. 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. who is not willing to undertake risky investments and did not receive a windfall greater than $3. This ﬁgure only shows that controlling for other factors. that this household starts saving for retirement when the household head is 43 years old. If we assume. This striking result is due to the assumption that this household is assumed not to cite saving for retirement as the most important reason. Saving motives change with age and household composition. 4.000 between 1983-86. The results show that savings of the household with an anticipated $2.

94 . households smooth consumption into the academic year and do not cut consumption in the 6-9 months before the academic year starts. The model uses the expected expenditures and other control variables that aﬀect savings to estimate an equation of savings. and the change in net worth excluding the capital gains on primary residence. Using the actual college expenditures reported in the 1983-86 Survey of Consumer Finances. 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. The amount of savings for college expenses increases with the age of the household head. which are the change in net worth between 1983 and 1986. The results are also consistent with the ﬁndings in Souleles [49].concerning the simultaneous determination of family size and college expenditure per child. The results are consistent with the predictions of the life-cycle theory of saving and consumption that households save in advance for expected expenses. Other things constant. which show that despite large college expenses. I estimate expected expenditures on children’s college education. I analyze the eﬀect of educational expenditures on two diﬀerent measures of savings. The main ﬁnding of this chapter is that households save in advance for children’s college expenditures. the diﬀerence between savings of households with and without college expenses can be as high as $8. By focusing on household savings.000 at the age of 43.

029 0.043 0.023 HH 0.351 0.035 SOTHER 0.068 0.033 0.391 0.369 0. .013 0.042 0.021 0.082 0.337 0.455 0.355 0.027 0.212 0.279 0.004 0.016 0.000 0. The number of observations N=1690.079 0. SEMERGE: saving for ‘rainy days.057 0.404 0.009 0.023 0. SHOME: saving to buy a home.049 0.007 0.010 0.115 0.310 0.401 0.027 0.000 0.000 0.053 0. Tabulations are weighted using the sample weights.016 95 0.223 0. SRETIRE: saving for retirement.043 0.074 0.058 0.083 0.037 NWORTH 0-25p 0 1-2 3 or more 0 1-2 3 or more 0 1-2 3 or more 0.383 0.341 0.397 0.1: Saving Motives By the Number of Children SRETIRE 0.153 CHILD 0 1-2 3 or more 0.009 0.120 0.053 SHOME 0.471 0.244 0.070 0. 1983.032 25-75p 75 to 100p Source: Survey of Consumer Finances.278 0.330 0.381 0.377 0.064 0.102 0.440 0.341 0. Notes: This table reports the proportion of households citing the selected motives as the most important reason for saving.345 SEMERG SCHEDU 0.066 0.380 NOSAVE 0.002 0.469 0.063 0.Table 4.382 0.087 0. SOTHER: saving for other reasons and NOSAVE: cannot/does not save.543 0.339 0.057 0.049 0.264 0.’ SCHEDU: saving for the education of children.060 0.042 0.

28 RISKY 0.65 0. 96 .43 HIGHSCH 0.10 FEMALE 0.35 WINDF 0.28 0.17 0.08 0.86 0.64 NWORTH 81575.24 0.32 15127.37 NSMSA 0.68 AGE 42. 1983-86.08 161860.75 TRINC 3296.32 2817.53 0. Deviation CHILD 2.24 0.48 BEDUCAT 0.41 33402.36 SAVE1 5806.2: Descriptive Summary of Variables Variables Mean Std.13 35397.Table 4.1.47 SAVE2 4811.43 COLLEG 0. The number of observations N=1690.43 14. All variables are described in Appendix C.45 Source: Survey of Consumer Finances. All dollar values are reported in 1986 dollars.13 0.86 PERINC 25931. Notes: Tabulations are weighted using sample weights.14 COLLEXP> 0 2005.11 12491.47 2.50 BLACK 0.33 MARRIED 0.

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. The number of observations N=1690. Notes: NCHCOLL shows the number of children attending college between 1983-86. Tabulations are weighted using sample weights.Table 4. All dollar values are reported in 1986 dollars. 1983-86.

408 0.062 ** 1.022 0.032 0. Variables are described in Appendix C.Table 4.078 0.126 ** -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. and * indicates signiﬁcance at 10 percent level.930 0.097 ** 0.038 0. Error -1.43 -2971.106 0.039 ** -0.48 0.038 0.1. Notes: ** indicates signiﬁcance at 5 percent level.090 ** -0.062 ** 1690 2.128 ** 0.145 ** 0.461 0.004 ** -0. 98 .293 Source: Survey of Consumer Finances. 1983-86.717 0.435 0.389 0.057 ** -0.134 ** 0.964 0.

0 0. Error -601.4 1589.2 19.3 2444. 1983-86.6 -1124.8 ** -1103.7 1467.1.1 550.0 ** 72.8 232.2 88.9 ** 67.0 409.1 72.7 ** 1391.5 -1335.1 -4936.3 609.7 338 .5 22.2 2524.9 -45.6 1452.5 551.5: Tobit Estimates of College Expenditure Equation Coeﬃcient Std.8 468.9 2912.4 92.8 473.746 -2429.5 18.7 * 997.0 9. 99 . Notes: ** indicates signiﬁcance at 5 percent level.9 ** -4903.0 ** 2905.9 -458.9 ** -187.6 408.4 555.1 611. All variables are described in Appendix C.6 133.6 -407. and * indicates signiﬁcance at 10 percent level.81 CONSTANT AGE CHILD CHILD PERINC/1000 BEDUCAT SRETIRE SEMERG SCHEDUC SHOME COLLEG TRINC/1000 SIGMA N OBS Proportion of + observations Log L ** ** * ** ** * ** ** -2429.1 1063.9 557.70 Source: Survey of Consumer Finances.8 -372.3 134.5 472. Error Coeﬃcient Std.Table 4.4 10.8 -7.4 23.

100 .29 1436 44.6: 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. All dollar values are reported in 1986 dollars. Notes: Tabulations are weighted using sample weights.Table 4.02 0 7.52 0 5. 1983-86. CHCOLL=1 if the household has a child attending college between 1983-86 (0 otherwise).59 2334 17. The number of observations N=1690.65 0 1.93 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.

2 ** -1284.0 1271.9 1728.107 SAVE2 Coeﬃcient Std.3 2016. All variables are described in Appendix C.6 388.8 761.6 10944.2 ** -9.5 2409.1 4894.6 -315.4 2538.8 2783.Table 4.8 140.8 4.3 ** 10.0 -11398.1 3139.8 163.4 2434.6 ** -9329.3 ** 309.9 11080.1 * 4679. Notes: ** indicates signiﬁcance at 5 percent level.3 0.3 10.0 2460.4 ** 336. a Predicted value of the variable from Tobit regression of educational expenditures.5 .8 3199.0 5607.3 416.8 160.1 2796.8 .2 3422.5 1325.2 3.084 Source: Survey of Consumer Finances.0 7833.5 -1310.5 2493.3 * 3028.8 382.6 1516.2 1820.2 5041.1 4. and * indicates signiﬁcance at 10 percent level. 1983-86.0 -790.9 2474.8 3349.5 0.1.7: 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.3 2954.0 1642.7 ** 0. .8 ** 6820. Error 22618.9 139.0 382.2 3.6 407.2 -10.6 2026.3 0.3 -774.8 -615. Error ** 22327.

Figure 4. 102 .1: The Importance of Educational Expenses on Savings SAVE16 10. 791 − ? savings of a household with $2000 college expenses. • savings of a household with no college expenses. 068 − | 28 | 33 | 38 | 43 • | 48 | 53 Age • • −5. 736 − • • • | 23 −1. 045 − • 3.

Appendices 103 .

The SCF does not contain information on some possible deductions such as medical expenses. royalties. I use the information on marital status. In determining ﬁling status and personal exemptions. job expenses and moving expenses. The SCF collects information on many components of total income. including wage and salaries. state and local income taxes. dividends. taxable interest.Appendix A Appendix for Chapter 2 A. All married couples are assumed to ﬁle a joint return. number of dependents.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. The sum of household income from all sources gives the adjusted gross income (AGI). Subtracting the standard deduction and exemptions from the AGI 104 . Thus. rents. tax-exempt interest. alimony received. households are assumed to claim standard deductions instead of itemizing deductions. and age of the household head and the spouse. Components of income such as other gains and IRA distributions that are not reported in the SCF are set to zero. business income and farm income.

CHILD0 CHILD1 CHILD2 CHILD3 =1 if no children are living in the household. =1 if the household head is married. Number of children younger than age 22 who live in the household. =1 if two children are living in the household.once with AGI and then with AGI minus 100. The diﬀerence in total tax liabilities divided by 100 gives the marginal tax rate. =1 if only one child is living in the household. See Appendix A. Consumption demand for housing.3. See Appendix A. 105 .yields the taxable income.1. =1 if the household head is a single female. 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. For homeowners. The marginal tax rate is computed by running this method twice . A. AGE MARRIED FEMALE NCHILD Age of the household head in years.2 Name Deﬁnition of Variables Description Estimated earnings of the household head and spouse at the age of 45. INCOME ASSET MTR Eh Total assets of the household. it is the opportunity cost of owning a house. Marginal tax rate of the household.

=1 if the household head reports that he is willing to take risky investments. and the second is transitory changes in earnings. YEAR92 YEAR95 YEAR98 =1 if the household is included in the 1992 survey. =1 if the household head is white.CHAGE13 HOMEOWN WHITE RISKY =1 if the youngest child is older than age 13. =1 if the household is included in the 1998 survey. This measure is deﬁned as predicted earnings at the age of 45 plus an individual-speciﬁc eﬀect. =1 the household is a homeowner. Thus. (A. εpi is an unobservable variable measuring characteristics such as ability (εpi 2 has zero mean and variance of σs ). =1 if the household is included in the 1995 survey. earnings 106 . βp is the parameter vector.3 Estimating Permanent Income The measure of permanent income is constructed using the method outlined in King and Dicks-Mireaux [40]. A. Observed earnings are assumed to diﬀer from permanent income in two ways. and c(AGEi ) is a cohort eﬀect.1) where Zi is a vector of observable characteristics. The permanent income Y for individual i is deﬁned as Ln Yi = Zi βp + εpi − c(AGEi ). The ﬁrst is due to the movements along the age-earnings proﬁle over the life cycle.

I assume that the cohort eﬀect.2) and estimate the resulting earnings equation using each wave of SCF separately. and this provides the ˆ estimate βp . The same procedure is used for spouses. Finally.2) where e(. 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 . I combine (A. permanent income is calculated from Zi βp . I calculate the minimum variance estimator of εpi using εpi = α(εpi + uit ).1) and (A. Following King and Dicks-Mireaux [40]. I assume that α = 0. Since age-earnings proﬁle e(AGEit − 45) and c(AGEi ) cannot be identiﬁed for this estimation. with one exception. Earnings equations are estimated separately for household heads and spouses. ˆ is zero. To construct an estimate of permanent income. King and Dicks-Mireaux [40] use outside data to impose a cohort eﬀect. and is assumed to be uncorrelated with εpi ). For heads with zero ˆ earnings. ˆ (A. Their permanent income is adjusted for 107 .5. εpi and c(AGEi ).in year t are Ln Eit = Ln Yi + e(AGEit − 45) + uit .) measures the log of the age-earnings proﬁle. The selectivity-adjusted earnings functions are estimated for the sample consisting of individuals with nonzero earnings. I need the estimates of βp . Instead.3) 2 2 2 where α = σs /(σs + σu ). c(AGEi ). to get an estimate of εpi . (A.

non-participation at diﬀerent stages of the life cycle as follows: ˆ Yiw = Yi P rob(Ei > 0). Household permanent income is the sum of the estimates of permanent income for the head and spouse. and the probability of nonzero earnings is computed for each spouse from the probit estimates. ˆ where Yi is the permanent income estimate. 108 .

VRLI Variance of residual of log income from the earnings equation.1 Name SAVE1 Deﬁnition of Variables Description First diﬀerence in net worth between 1983-89 divided by 6. SAVE2 First diﬀerence in net worth between 1983-89 controlling for capital gains in home prices divided by 6. Mean of the residual income from the earnings regression. 109 . Mean of the predicted income from the earnings regression.Appendix B Appendix for Chapter 3 B. =1 if the household in the bottom 25 percent of the net worth distribution in 1983. VRI MEANINC PERMINC TRANS NWORTH NWORTH25 Variance of log income. Mean of reported income between 1982-88. Household net worth in 1983. NWORTH90 =1 if the household in the 10 percent of the net worth distribution in 1983. AGE Age of the household head in 1983.

NADULT ∆NADULT BEQUEST HOWN83 HOWN89 SPFULLT Number of adults living in the household in 1983. Number of children between age 7-12 in 1983. =1 if the household owns a home in 1983. 110 . =1 if the household had an additional child between 1983-89. =1 if the household head is white. Number of children between age 0-6 in 1983. =1 if the household head is married. =1 if the household head is planning to leave a bequest. Change in the number of adults between 1983-89. Number of children between age 13-18 in 1983. Number of children living in the household in 1983. =1 if the spouse is working fulltime in 1983.EDUC WHITE MARRIED NCHILD YOUNGCH MIDDCH HIGHSCH ∆CHILD Years of education of the household head in 1983. =1 if the household owns a home in 1989.

Diﬀerence between net worth in 1986 and 1983 divided by 3.1 Name CHILD COLLEXP Deﬁnition of Variables Description Number of children ever born to the household head. NWORTH75 =1 if the household is in the top 25 percentile of the wealth distribution. =1 if the household head is female. Diﬀerence between total income in 1985 and permanent income. Diﬀerence between net worth in 1986 excluding the capital gains on primary residence and net worth in 1983 divided by 3. AGE FEMALE HIGHSCH Age of the household head in 1983.Appendix C Appendix for Chapter 4 C. Amount of expenditure on the college education of a child in 1986 dollars. =1 if the household is in the bottom 25 percentile of the wealth distribution. PERINC TRINC SAVE1 SAVE2 Predicted 1985 household income. 111 . NWORTH NWORTH25 Net worth in 1986. =1 if the household head has a high school degree.

HIGHSCHSP =1 if the spouse has a high school degree. Number of children attending college between 1983-86. SRETIRE SEMERGE SCHEDU =1 if retirement is the most important reason for saving.COLLEG =1 if the household head has a college degree. =1 if the household head is African-American. SHOME =1 if saving to buy a home is the most important reason for saving.000 between 1983-86. NSMSA NCHCOLL =1 if the place of residence is not in a SMSA. 112 . COLLEGSP FSPOUSE BLACK MARRIED RISKY =1 if the spouse has a college degree. SOTHER =1 if the household cited another reason as the most important reason to save. =1 if the household head is willing to undertake risky investments. =1 if emergencies are the most important reason for saving. =1 if children’s education is the most important reason for saving. =1 if the household head is married. WINDF =1 if the household received a windfall greater than $3. BEDUCAT =1 if the household head thinks it is all right to borrow for education. =1 if the spouse is working at a full-time job.

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Eﬀective August 2002.Vita Tansel Yilmazer was born in Izmir. g c She began her graduate studies at Boˆazi¸i University. Permanent address: 834 Main Street Apt. where she received a g c Master of Arts degree in Economics in June 1997. 121 . she accepted an assistant professor position at Purdue University. She received her Bachelor of Arts degree in Business Administration from Boˆazi¸i University in January 1994. 1970. IN 47901 This dissertation was typed by the author. Turkey on June 2. the daugh¨ ter of Onder Yilmazer and Necla Yilmazer. She later continued her education at the University of Texas at Austin. B Lafayette.

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