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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

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

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

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

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

. . The Relationship between Fertility and Saving . . . Chapter 3. . . . . . . . . .5 Conclusion . . . . . . . . . . . . . . . .1 Introduction . . . . . . 2. .2 The Model . . . . . . . . . . . Conclusion . Do Children Aﬀect Household Portfolio Allocation? 2. . .2. . . . . . . . . . . . . .4 Estimation and Results . .3 3. . . . . . .5 The Eﬀect of Precautionary Motives Saving and Fertility Introduction . . . . . . . . . . . . . . . . . . . . . vii . .1 Theory .1 3. . . . . . . . . . . . . . on Household . . . .Table of Contents Acknowledgments Abstract List of Tables List of Figures Chapter 1. . . . . 2. . . . . . . . . . . . . . . . . . . . . . . 3. . . . . . . . .2 Empirical Model . . . . . . . . . . . . . . 2. . . . . . . . . Data . . . . .2 3. . . . . . . 2. . . . . . . . . . . . .3 Data . . . . .4 3. . . . . . . . . . . . . . . . 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. . . . . . . . . . . . . . . . 2. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

. . . 1998: Continued . . . . Descriptive Statistics by Household Fertility Decision . . . . . . . . . . . . . . . . . . Mean Asset Shares by Year . . . . . . . Mean Asset Shares. . . . . . Poisson Regression: Number of Children . . . . .8 2. . . . . . . . . Results: Asset Shares and Housing Expenditure of Homeowners Homeowners: Continued . . . . . Mean Asset Shares.8 4. . . . . . . . . . . . . . . . . . . Mean Income Uncertainty by Household Demographics . Expenditure on Housing. . . .3 3. . 33 34 35 36 37 38 39 40 41 42 43 65 66 67 68 69 70 71 72 95 96 97 98 99 . . . .1 4. . . . . . . . .2 3. . .3 4. .List of Tables 2. . . .7 3. . . . . . Results from Probit Estimation . . . . Children in . . . . . . . . . . . Renters: Continued . . . . . . . . . . . . . . .5 Descriptive Statistics by Year . . . .3 2. . . . The Eﬀect of a Change in the Fertility Decision on SAVE1 . . . .5 3. . . . . . . . . . . . . .11 3. . . . .1 2. . . . . . . . 1983 . . . Regressions of SAVE1 on Income Uncertainty with Endogenous Fertility Decision . . . Saving Motives By the Number of Children . . . . . . .4 4. . . . . . . . . . . . . . . . . Descriptive Summary of Variables . .10 2. . . . . . . . 1998 . . . . . . . . . . . . . .4 3.2 4. . . .7 2. . . . . . . . .4 2. 1998 . . . . . .9 2.2 2. .5 2. . . . . .1 3. Regressions of SAVE2 on Income Uncertainty with Endogenous Fertility Decision . . . . Portfolio Shares for Assets by the Number of Children and Age Saving Motives by Age Groups. . . . . . Savings. . . . . Tobit Estimates of College Expenditure Equation ix . . . . . . Savings and College Expenses by the Number of College . . . . . . . Results: Asset Shares and Housing Expenditure of Renters . . .6 2. . .6 3. . . . . . . . . . . . . . . Income and Income Uncertainty by Age and Fertility Probit: Fertility Decision of Fecund Households . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

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

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

the household head. These results are consistent with the predictions of the life-cycle theory of saving and consumption that households save in advance for expected expenses to smooth their consumption. 5 .

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

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

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

The literature on housing demand has recognized the role of children on the tenure choice and the demand for housing services. 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. Harun et al. In Berkovec and Fullerton.an investment constraint requires that the quantity of housing owned is at least as large as the quantity of housing consumed. For example. 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.5 percent. the homeowner’s optimal portfolio is ineﬃcient in a mean-variance framework. 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. Their simulation concentrates on the eﬀect of taxes on the tenure choice and owner-occupied housing. [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. Robst et al. The results of his model show that when the constraint imposed by housing is binding. households decide on tenure and quantity of housing taking both consumption and investment motives into account. His model analyzes the resulting distortion of the eﬀect of this investment constraint on the portfolio choice of homeowners. [36] show that 9 .

However. only 41 percent of households held stocks directly or indirectly in IRAs. however. 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 . 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. Demographic characteristics such as age. marital status. U. Many studies have investigated the reasons that most households choose to hold incomplete portfolios. these variables do not aﬀect the housing demand of homeowners. according to the 1995 SCF.S. as noted in Goodman [24]. Ihlanfeldt [33] reports housing demand estimates obtained separately from two samples-recent movers and nonmovers. their results show that the presence of children in school has either an insigniﬁcant or a negative eﬀect on the demand for housing. The information cost of monitoring and managing a portfolio is suggested as an important reason for holding riskless assets. For example. After controlling for the household size.an additional child increases the probability of owning a home by around 8 percent. little systematic treatment of children has appeared in the estimation of tenure choice and housing demand. The results of the previous studies show that dependent children have some impact on the demand for housing. households typically invest in only a few of the assets available in the economy. 401(k)s. Goodman and Kawai [25] ﬁnd that larger households prefer more housing. Among recent movers. deﬁned beneﬁt pensions and mutual funds. Besides housing.

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

Following Brueckner [7] and 12 . Children living in the household also aﬀects the portfolio choice of renters. The consumer maximizes a multiperiod utility function.2 introduces the theoretical model and discusses the empirical speciﬁcation of the model. homeowners decrease the portfolio share in retirement accounts while they increase the portfolio share in housing.3 describes the data set and the variables used in the empirical work. Renters invest a smaller share of their portfolio in interest-bearing accounts with an increase in the number of children. and how much to allocate to other risky assets.5. 2. 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. Section 2. 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.2. Section 2. As a result of the portfolio constraint imposed by the housing demand of children. The number of children also increases the housing demand of homeowners. The estimation results are reported in Section 2. The remainder of this chapter is organized as follows. Controlling for the number of children and other variables.4.on the probability of owning a home.2 2. A summary of the ﬁndings and concluding remarks are presented in Section 2.1 The Model Theory This section examines the behavior of a consumer deciding whether to rent or own a home.

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

3) If the consumer rents a house. (2. the return on housing and the return on other assets are assumed to be normal variables with the expected values rh and rj .. θjk is the covariance of returns between asset j and k.. are the variances of rh and rk . respectively. h = 0 in equations (2. (2..J. . (2. then the ﬁrst period budget constraint is given by J c = w − po hc − r j=0 aj .7) where θhh and θjj . h The total return of the portfolio is given by J R = rh h + j=0 rj aj . For homeowners.. and θjh is the covariance of returns between asset j and housing.5) since h is equal to zero for renters. . 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. 14 . 2. In the model. j = 1.4) where po r is the price of a unit of housing for renters. J.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 . The total return of the J portfolio is given by R= j=0 rj aj . (2.where w is her initial wealth and po is the current price of a unit of housing. For renters.7). j = 1.6) and (2.

hc (and thus σ) is chosen optimally.. J.. and the standard normal variable z as follows: U (c. j = c j 0. the asset levels aj . (2. The empirical model described in the next section focuses on the interaction between these two stages of decision making. j = 0. For both homeowners and renters.5). hc ) + δ V (R + σz + y)φ(z)dz. .. 2. .2). are chosen optimally with hc and σ held constant. that maximize (2. and to owner-occupied housing (sh ) is modeled as follows. and a∗ .. j = 0.3). h∗ and a∗ . I rewrite the objective function (2. (2.9) where Xh is a vector of year dummies and characteristics that are associated 15 . 1. The consumer also decides on c∗ .6) and (2.6) and (2. (2.1) in terms of R.Following Fama and Miller [21] and Brueckner [7]. c j (2. J. h∗ . 1. In the second stage. J.8) subject to (2.) is the standard normal density function.8) where φ(. how much to spend on housing (Eh ). σ. In the ﬁrst stage.. (2.7).2 Empirical Model The joint determination of whether own a house (H=1) or not (H=0). The consumer’s problem is to choose c∗ .. and shares of wealth to allocate to each asset j (sj ). 1.4).7) and decides to own or rent a house comparing the utilities in two outcomes. First. this problem can be solved in two stages.1) subject to (2. that maximize (2. (2.2. a household determines whether to own or rent a house: H = 1 if Xh β1 + ε1 > 0 = 0 otherwise. ..

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

population. Each survey consists of a representative sample of the U. 4) HOUSE is the market value of owner-occupied housing. 401(k)s. 1. money market deposit accounts.519 out of 4. and 7) OTHER includes trusts.S.2. in 1995. For owners. 3) RETIRE includes IRAs. 2) STOCK includes all assets held in stocks. the cost of housing services depends on In the 1989 SCF. a triennial survey conducted by the Federal Reserve Board. all types of bonds. and demographic characteristics. The survey contains detailed information on household portfolios.299. 1992. The SCF constructs sample weights to blend the supplements with the area-probability sample to get a more representative sample of the U. 1. cash value of life insurance. and other assets like arts and precious metals.143 households.409 out of 4. certiﬁcates of deposit. call accounts.3 Total assets are grouped into six categories: 1) ACCOUNT includes all holdings of checking accounts. 5) VEHICLE is the value of all the vehicles the household owns. and other deﬁned contribution plans. Investments in businesses are not included in total assets because they generate an income that is diﬃcult to separate from earnings. saving accounts. 1. The consumption demand for housing is computed for renters and homeowners as follows. and mutual funds.S. Keogh. population and a supplement of high-wealth households drawn from Internal Revenue Service ﬁle of high-income returns. 6) RESTATE includes the market value of seasonal residences and other property.309 households. in 1992. the supplement consists of 866 out of 3.480 out of 3. income. and in 1998. 1995 and 1998 SCF. 3 17 .3 Data The data for this study are taken from the 1989.906.

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

households with the highest 0.1 shows the summary statistics for all the variables used in the estimation. 5 Of the remaining households. 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. most of which have not changed much over time.807 households in 1989. I take the estimated earnings of the household head and the spouse at the age of 45 and an individual-speciﬁc eﬀect. Therefore. Sample demographics show the age of the household head (AGE). 3.4 Second. 1992. 3. 127. 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. households with female heads are headed by single females. The same pattern is true for permanent income (INCOME). and 1998 SCF.900. respectively. 4 19 .3. 214. marital status (MARRIED) and gender (FEMALE) of the household head and the fraction of homeowners (HOMEOWN). 183. 1992. 1995 and 1998. 209 and 193 were in the 0. (ii) it owns both the mobile house and the site. respectively. Table 2. 317 and 309 households were neither renters nor owners and were dropped from the sample. The variables are described in detail in Appendix A. 1995 and 1998. 116. to avoid the inﬂuence of extreme outliers on the regression.509. respectively.2. 1992.5 The ﬁnal sample consists of 13. both mean and median wealth (ASSET) have risen since 1992.1 percentile of the weighted wealth distribution in the 1989.989 observations. The calculation of permanent income follows King and Dicks-Mireaux [40] and is described in Appendix A. a co-op or a townhouse association. 2. As a proxy for permanent income.6 However. 1995.culate housing expenditure.1 percent weighted wealth holdings in each wave of the SCF are dropped. or (iii) it owns part or all of the farm/ranch on which it lives on. 6 The SCF deﬁnes the head of the household to be the husband for all married households. In 1989.773 and 3.

representing 39. VEHICLE and RESTATE. The portfolio share for ACCOUNT declined from 14. As shown in Table 2. followed by ACCOUNT.4 percent of total assets in 1998. the composition of households’ portfolios reveals the importance of housing as an asset.2 presents interesting changes in household portfolio structures over time. Assets in these accounts increased from 5.83 in 1989 to 0.2. Second.7 percent of total assets in 1989 to 10. First. HOUSE is the most important asset.2 percent in 1998 due to an increase in the portfolio share for saving accounts. but it rose to 13.6 percent in 1998). the share for RETIRE increases sharply. age.75 in 1995 and stayed the same in 1998. Table 2. wealth and children (the number of children living in the household) groups. STOCK and RETIRE in 1998 oﬀset the decline in HOUSE.5 percent in 1998. This suggests that households have substituted ﬁnancial assets for nonﬁnancial assets. 20 .was higher for homeowners in 1992 than in other years due to the decline in house prices in that year. The average number of children (NCHILD) living in the household declined from 0. Table 2.2 percent in 1995. The ﬁrst column shows the share of households in diﬀerent income. there is a steady growth in the portfolio share for STOCK and a steady decline in the portfolio share for RESTATE since 1989. The percentage of households with all children older than age 13 (CHAGE13) has stayed the same since 1992. The increases in ACCOUNT.3 presents housing expenditures of homeowners and renters in 1998.3 percent in 1989 to 11. The second largest asset in the households’ portfolios is VEHICLE (18.

8 percent of total assets) following 21 . renters spend more on housing than owners. Since the primary residence is the largest part of homeowners’ wealth. for renters.042 for homeowners and $6. For renters. For homeowners. age of the household head. reaching a peak among households with two children. accounting for 57.4 shows the portfolio shares of assets that homeowners and renters hold.000 and income below $50.The second column indicates the percentage of each of these groups that are homeowners. Tables 2.0 percent). in the remaining two columns of the table. however. 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. wealth and the age of the household head. it declines after age 50. For homeowners.5 percent of total assets) followed by ACCOUNT (26. VEHICLE is the most important asset held (41. VEHICLE is the third largest asset (7.030 for renters. wealth and the number of children in the household. respectively.9 percent. It also increases with the number of children.4 and 2. First. The percentage of households who are homeowners increases with income.000. Among households with wealth below $250. Average housing expenditures for homeowners and renters are presented. The housing expenditures of renters and homeowners also increase with income. wealth. The average housing expenditure is $7. The ﬁrst row of Table 2.5 show the household portfolio composition in 1998 by household permanent income. and the number of children. there are marked diﬀerences in household portfolios of renters and owners. the expenditure on housing declines after the age of 65.

For higher levels of income. The portfolio shares for other assets such as STOCK. 42. the share of the portfolio allocated to STOCK rise at a rapid rate with wealth. Several ﬁndings are worth noting.000. Of the households with income above $100.7 percent are homeowners. among homeowners that have wealth exceeding $1 million. the fraction of households who are homeowners increases.4 also presents the life cycle patterns in household portfolios. portfolio composition of households with heads over the age of 65 diﬀers considerably from other age groups’ portfolios. accumulation in STOCK relative to other assets increases over age 65. the portfolio share for ACCOUNT almost doubles both for homeowners and renters over the age of 65 compared to 50-64 year old group. in contrast. we observe striking diﬀerences in the composition of portfolios by the level of wealth. as shown in Tables 2. of the households with income below $15. Also. 86.000. but they hold only 42.2 percent).6 percent of total assets in housing. the share of the portfolio allocated to RESTATE and for all households. This suggests that households with heads over age 65 substitute 22 .4. Another noteworthy ﬁnding is that the portfolio shares for STOCK and RETIRE for both homeowners and renters rise with income. Also.6 percent. STOCK is the most important asset category with a share equal to 25.9 percent of their total assets in housing.RETIRE (10. First. Not surprisingly.3 and 2. For homeowners. Table 2.7 percent are homeowners holding 75. For example. For example.2 percent of total assets while housing accounted for only 22. while the housing share of portfolio declines. RETIRE and RESTATE are almost equal for renters and owners.

5 looks at the link between children and shares of assets in both renters’ and homeowners’ portfolios.liquid assets for nonﬁnancial assets. Children are likely to aﬀect the portfolio structures in two ways. Homeowners invest a smaller share of their portfolio in interest-bearing accounts and stocks with an increase in the number of children. Second. the presence of children increases the share of the portfolio allocated to vehicles. Table 2. and age groups. Finally.3 percent for those with three or more children. For example.5 shows the portfolio shares by the number of children living in the household. The table indicates a strong relation between children and the share of portfolio allocated to housing. Also. wealth. The results indicate that the number of children living in the household aﬀects the portfolio shares for assets and 23 . and 65. but it stays steady after age 65.4 and 2. the portfolio share for HOUSE declines with age among the households headed by persons below age 65. 60. The ﬁrst is their eﬀect on the choice of tenure. While portfolio composition diﬀers considerably between renters and homeowners. and the second is their eﬀect on asset shares of portfolios conditional upon ownership.9 percent for households with 2 children.5 reveal striking diﬀerences in portfolio structures across income.0 percent of the wealth for households with no children. Table 2.3 investigates the eﬀect of children on the tenure choice. and table 2. age and wealth are similar. Tables 2. housing accounts for 56. The portfolio share for owner-occupied housing increases with the number of children. the relative changes in portfolio shares of assets by income.

Previous research also indicates that a household’s marginal tax rate (MRT) has an eﬀect on its asset allocation decisions. 2. 111 in 1992. 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.4 Estimation and Results The resulting set of equations constitutes an endogenous switching model in the form of a multivariate regression model. VEHICLE. 24 . and RESTATE in the estimation of the model. Dummy variables indicating the number and the age of children living in the household are included in X. I drop one group of assets. OTHER. and 106 in 1998 had zero wealth holding. and include ACCOUNT.the probability that a household owns a home. Moreover. Then I solve for the parameters of OTHER from the other equations. the marital 7 93 households in 1989. RETIRE. permanent income and wealth in determining the asset shares in household portfolios. HOUSE. 410 report zero wealth holding. STOCK. The other variables in X are chosen to be consistent with previous empirical studies. and the disturbance covariance matrix is singular. Portfolio choice theory has shown the importance of age. Thus. Portfolio shares of the J + 1 assets and housing sum to one.898 households. Of 13.7 I exclude those households from the sample and correct for sample selection.

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 share for ACCOUNT decreases. Selfselection occurred in households’ tenure choice.to HOUSE and VEHICLE. The eﬀect of children is less pronounced for renters than for homeowners. An increase in total assets leads to an increase in the share for STOCK. and a lower share for VEHICLE. Since 1995. should they choose to buy homes.10 present the estimates of the equations (2.11) for renters. RETIRE and RESTATE.9 and 2.7-2. RESTATE and OTHER. It leads to a decrease in the share allocated to ACCOUNT. As renters have two or more children. RETIRE and HOUSE for homeowners are all statistically signiﬁcant. The portfolio share for RETIRE increases with age until the age of 58. 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. renters have shifted toward RETIRE in their portfolio. Tables 2. For these assets. respectively.0 percent higher in renters’ portfolio. for example. STOCK. and the share for VEHICLE is signiﬁcantly higher for households with three or more children. Compared to 1989.10 report coeﬃcients of the selectivity variables. The coeﬃcients on the selection terms in equations for ACCOUNT. while the portfolio share for ACCOUNT and STOCK decreases until the age 40 and 43. the 1998 portfolio share for RETIRE is 5. Tables 2. homeownership would not have the same eﬀect on renters. More permanent income is associated with a higher share for ACCOUNT. RESTATE and OTHER and a decrease in the share for ACCOUNT and VEHICLE. The estimates of the Mills ratios for renters are signiﬁcantly diﬀerent from zero 28 .

RETIRE. 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. Homeowners with one child have 11. The last two columns in Tables 2. and RESTATE.9 percent higher housing expenditure than homeowners with no child.11 presents the estimates of shares for assets that a typical homeowner holds. I mean a household headed by a white married. On the other hand. 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. For homeowners. there were no signiﬁcant diﬀerences in the average behavior of the two groups prior to home purchase. The age of the children in the household has no eﬀect on the housing expenditure of renters nor homeowners. The housing expenditure of homeowners increases 8.3 percent with the second child.for ACCOUNT. but the number of children has no eﬀect on renters’ expenditure. This implies that other than in regards to these three assets. the expenditure on housing increases with the number of children. Table 2. all of the children in the household are younger 29 .10 present the estimates of the housing expenditure equation.2 percent. having more children increases the housing expenditures of homeowners by only 3.8 and 2. After the second child. For both renters and owners. 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. By a typical household.

more is invested in RETIRE. children have two eﬀects on the portfolio structure of households.5 Conclusion Using the 1989. 2.160) and permanent income ($46. As mentioned above. VEHICLE is the second most important asset in the portfolio when the household head is 30 years old. 1992. As the household head reaches middle age. At all ages. 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. children change the demand for each asset. Second. conditional on the tenure choice.690) and has a 15 percent marginal tax rate. The household head is willing to take risky investments and holds mean wealth ($188. HOUSE is the most important asset. 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. Using a 30 . 1995 and 1998 SCF. and the share allocated to RETIRE becomes the second largest in the portfolio.11 include both of these eﬀects. The number of children has a negative eﬀect on the portfolio share for RETIRE. First. an increase in the number of children increases the probability that a household owns a home. and its importance in the portfolio increase with the number of children living in the household.than age 13. The chapter examines the impact of children on the homeownership decision and the constraint of consumption demand for owner-occupied housing.

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

Most households ﬁnance their home purchases with mortgage debt. 32 . 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.

829 116.815 258.28 0. Notes: 1) Tabulations are weighted using sample weights.12 0.154 0.75 0.12 0.83 0.97 48.660 12.14 0.658 222.695 47.807 0.27 0.5 0.328 206.50 3. 2) All dollar values are reported in 1998 dollars.750 0.Table 2.97 Source: Survey of Consumer Finances.968 46.151 203. All variables are deﬁned in Appendix A.158 0.59 0.664 6.80 0.97 48.900 0.985 6.59 0.8 0.51 2.684 92.28 0.054 49. 33 .59 0.9 0.61 3. The text deﬁnes total assets. 1989-1998.2.3 0.75 0.55 3.97 48.164 0.509 0.319 50.28 0. permanent income and net worth.65 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 47.64 0.191 92.65 0.58 0.773 0.11 0.131 5.525 101.66 0.

143 0.432 0.072 0. 2) The text deﬁnes the assets called ACCOUNT.059 0.415 0.Table 2. STOCK.196 0.410 0. 34 . RESTATE. HOUSE.053 0.130 0.394 0.132 0.105 0.047 0.094 0.112 0. VEHICLE. and OTHER.076 0.2: Mean Asset Shares by Year 1989 Portfolio Shares ACCOUNT STOCK RETIRE HOUSE VEHICLE RESTATE OTHER 1992 1995 1998 0. RETIRE.067 0.057 0.043 0.068 0.072 Source: Survey of Consumer Finances.186 0. Notes: 1) Tabulations are weighted using sample weights. 1989-1998.059 0.208 0.076 0.050 0.197 0.043 0.

002 6.46 14.90 19.400 5.456 11.741 7.72 78.645 61.024 6.12 80.081 6.843 9.475 5.22 7.3: Expenditure on Housing.79 64.555 93.391 Source: Survey of Consumer Finances. 2) HH represents all households.16 12.378 $50-100K 29.77 67.438 8.54 5.24 86.72 3.293 $15-30K 22.43 9. HO represents homeowners and RR represents renters.866 4.677 6.564 5.546 80.46 72.183 7.976 7. Notes: 1) Tabulations are weighted using sample weights.38 29. 1998.030 Income Below $15K 10.081 $30-50K 29.93 1.587 95. 35 . 1998 Eh 1998 dollars %HH %HO HO RR All households 100 66.883 Above $100K 8.486 95.496 6.078 7.195 5.803 8.489 32.42 78.17 15.78 7.08 22.35 42.29 68.26 21.69 4.Table 2.042 6.09 64.69 3.89 6.065 7.847 15.50 51.973 6.55 6.90 12.263 5.49 36.748 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 22.29 4.931 6.40 34.03 21.04 5.764 6.28 9.72 14.22 64.

251 0.107 0.181 0.090 0.091 0.730 0. .454 0.109 36 All households Income Below $15K 0.059 0.490 0.445 0.027 0.010 0.080 0.151 0.015 0.073 $250-1000K 0.Table 2.021 0 0.137 0.205 0.149 0.075 continued on the next page.252 0.032 0.389 0.069 0.112 0.075 Age Under 35 0.374 0.172 0.587 0.087 0.226 0.071 0 0.043 0 0.750 0.051 0.089 0.046 0.061 0.047 0.055 0.019 0.579 0 0.025 0.149 0.014 0 0.064 0.007 0.270 0.062 Above 65 0.287 0.062 0.608 0.645 0.559 0.111 0 0.127 0.111 0.086 0.489 0.083 0.088 0.166 0.135 0.234 0.042 $50K-100K 0.453 0.541 0.759 0.485 0.221 0.091 0.039 0 0.049 0.020 0.112 0.056 0.256 0.048 50-64 0.047 0.097 0.165 0.102 0.415 0.066 $50-100K 0.090 $30-50K 0.062 Above $100K 0.061 0.078 0.004 0.077 0.040 0.147 0.083 0.630 0.158 0.535 0.199 0.157 0.047 0.052 0 0.089 0.047 0.213 0.046 0 0 0 0 0 0.192 0.028 0.238 0.071 0.092 0.183 0.068 0.074 0.201 0. 1998 ACCOUNT STOCK RETIRE HOUSE VEHICLE HO RR HO RR HO RR HO RR HO RR 0.054 $100K-250K 0.132 0.093 $15-30K 0.041 0.017 0.086 0.101 0.401 0.064 0.031 0.033 0.019 0.359 0.281 0.135 0.122 0.018 0.050 0 0.054 0.049 0.028 0.436 RESTATE HO RR 0.122 0.128 0.162 0.055 0.082 Above 1000K 0.078 0.293 0.190 0.091 0.080 0.212 0.056 0.129 Wealth Below $50K 0.068 0 0.072 0.413 0.162 0.065 0.002 0.260 0.4: Mean Asset Shares.022 0.022 0.295 0.694 0.011 0.049 0.143 0.040 35-49 0.

.087 0.085 0. Notes: 1) Tabulations are weighted using sample weights.049 0. 3) HO represents homeowners and RR represents renters.098 0.222 0.102 0.069 0.117 0.653 0 0 0 0 0. 1998.577 0. The text deﬁnes the assets called ACCOUNT.195 0.110 0. HOUSE.040 0.040 0. 1998: Continued ACCOUNT STOCK RETIRE HOUSE VEHICLE HO RR HO RR HO RR HO RR HO RR RESTATE HO RR 0.512 Children CHILD0 CHILD1 CHILD2 CHILD3 37 Source: Survey of Consumer Finances. 2) All dollar values are reported in 1998 dollars. VEHICLE.373 0.061 0.055 0.074 0.038 0. STOCK.052 0.560 0.087 0.098 0.5: Mean Asset Shares.089 0.088 0.019 0.038 0.045 0. and RESTATE.495 0.122 0.070 0.609 0.200 0.288 0.471 0.026 0.048 0.044 0.115 0.044 0. RETIRE.Table 2.062 0.032 0.044 0.

046 0.050 CONSTANT AGE AGE2 /100 MARRIED FEMALE CHILD1 CHILD2 CHILD3 CHAGE13 INCOME/10.404 0.085 0.047 ** 0.102 -0.042 ** 0.007 0.005 ** 0.004 ** 0.108 0.304 0.341 0.030 0.029 -0.040 ** -0. The number of observations N=13.010 2.174 0.052 ** 0.034 ** 0.118 0.041 * -0.193 0.000 0.040 -0.049 ** 0. 2) Variables are deﬁned in Appendix A.072 0.287 0.096 0.579.6: Results from Probit Estimation HOMEOWN Coeﬃcient Standard Errors Marginal Eﬀects -4.210 0.143 0. 38 .137 ** 0.261 0.044 ** 0.063 0.030 ** 0.053 0.052 0. and * indicates signiﬁcance at 5 percent level.2.137 0.153 ** 0.747 0.080 0.Table 2.000 MTR RISKY WHITE YEAR92 YEAR95 YEAR98 Notes: 1) ** indicates signiﬁcance at 1 percent level.005 ** 0.014 -0.

020 0.006 ** FEMALE 0.001 -0.7: Results: Asset Shares and Housing Expenditure of Homeowners ** ** ** ** ** ** ** ** 39 ** ** ** ** * * ** ** ** ** ** ** ** ** ** ** ** * ** ** ** * ** ** ** ** ** ** ** ** ** ** ** ** ** * ** ACCOUNT Coef SE CONSTANT 0.006 -0.115 0.003 -0.000 0.049 HOUSE Coef SE 1.001 -0.002 -0.001 0.008 0.007 0.023 0.063 0.003 0.021 0.006 0.002 -0.003 0.009 0.006 -0.001 0.002 0.001 0.007 -0.009 0.004 0.002 0.002 0.432 0.031 * STOCK Coef SE -0.059 0.016 0.067 0.010 0.005 CHILD1 -0.006 0.039 VEHICLE Coef SE 0.027 0.001 0.003 -0.024 0.087 0.029 0.026 0.003 ** YEAR95 -0.001 0.007 0.398 0.020 0.125 0.Table 2.006 0.001 0.008 -0.006 0.005 -0.012 0.002 0.032 0.006 -0.054 ** AGE -0.455 0.008 0.027 0.011 -0.062 0.002 ** L ASSET 0.006 ** CHILD3 -0.033 0.018 ** MR:+ wealth -0.009 0.006 L INCOME -0.012 0.001 ** AGE2 /100 0.001 0.006 0.002 -0.003 -0.063 0.008 0.021 0.020 -0.049 0.005 0.092 0.003 -0.011 0.008 0.020 -0.019 0.061 0.003 -0.005 0.010 0.009 0.000 0.307 0.007 -0.007 -0.010 0.006 0.005 0.001 * MTR -0.112 0.002 0.004 0.054 RETIRE Coef SE -0.023 0.007 -0.007 ** CHAGE13 -0.016 0.006 * CHILD2 -0.003 0.005 -0.005 0.001 -0.004 0.027 0.007 -0.001 0.013 0.190 0.004 0.021 0.004 0.056 0.008 0.006 -0.018 ** RISKY -0.005 0.005 0.515 0.003 0.021 0.004 ** MR:home -0.002 -0.089 0.009 0.007 0.007 0.007 0.069 -0.006 0.021 0.004 -0.056 0.198 0.008 0.003 ** YEAR98 -0.023 0.008 0. .026 0.063 0.006 -0.029 0.010 ** * ** continued on the next page.024 0.004 0.031 0.077 0.010 0.009 -0.007 0.024 0.013 0.003 ** YEAR92 -0.013 0.013 0.004 0.010 0.003 0.004 0.037 0.002 0.001 ** MARRIED -0.003 -0.003 0.005 0.022 0.

001 0.005 * YEAR95 0.001 0.005 -0.008 ** CHILD3 -0.006 -0.019 0.568 0.158 0. and OTHER.049 -0.036 0.006 0.189 0.025 MR: + wealth 0.181 0.024 0.005 YEAR98 -0.066 0.002.004 0. MR represents Mills Ratio. 2) The text deﬁnes the assets called ACCOUNT.004 -0. STOCK.010 0.017 0.003 0.015 -0.307 0.204 0.119 0. RETIRE.007 * L INCOME -0.120 ** ** ** ** ** RESTATE Coef SE CONSTANT -0.202 0.032 0.018 0.8: Homeowners: Continued ** ** ** ** ** ** ** ** ** 40 log Eh Coef SE * -0.503 0.009 FEMALE -0.177 0.001 -0.2.043 0.053 OTHER Coef SE -0.001 ** MARRIED -0.002 0.005 -0.010 0.015 0.012 0.024 0.002 ** 2 AGE /100 -0.584 0.008 0.094 0.007 ** * * 1.009 ** CHILD1 -0.008 0.002 0.004 0.004 -0.004 0.025 0.008 CHAGE13 0.234 0.003 ** L ASSET 0.008 CHILD2 -0.002 0.025 -0.002 ** MTR -0.007 0.080 ** AGE 0.014 0.000 0.003 0.004 0.001 0.023 0.052 0.010 0.005 -0.011 ** 0.004 0.002 0.021 0.393 -0.018 -0.008 0.004 0.017 0. The number of observations N=10. HOUSE. RESTATE.Table 2. VEHICLE.004 -0.036 Notes: 1) ** indicates signiﬁcance at 1 percent level.005 YEAR92 0.003 -0. All variables are deﬁned in Appendix A.005 ** MR:home -0.023 0.001 0.015 0.018 0.220 0. and * indicates signiﬁcance at 5 percent level.025 0.002 -0. .025 0.068 0.025 ** RISKY -0.004 -0.017 0.116 0.246 0.001 0.

.013 0.029 0.079 0.012 YEAR92 -0.007 0.051 0.016 0.050 0.007 0.9: Results: Asset Shares and Housing Expenditure of Renters ** ** ** ** ** ** ** * ** ** ** ** ** ** * ** ** ** 41 ACCOUNT Coef SE CONSTANT 0.038 0.008 -0.020 0.022 L INCOME 0.019 0.015 * YEAR98 0.017 0.006 -0.001 0.022 0.070 0.010 0.052 0.014 0.002 0.120 0.080 0.011 -0.025 0.002 ** 0.017 0.010 0.077 0.035 VEHICLE Coef SE 2.015 0.005 0.019 0.032 0.072 0.000 0.Table 2.026 -0.014 0.319 0.019 0.019 ** CHILD3 -0.021 ** FEMALE 0.074 0.001 0.019 0.011 0.001 0.035 0.002 ** MARRIED -0.007 0.003 ** AGE2 /100 0.008 0.005 0.097 -0.004 -0.089 0.012 0.005 0.243 -0.014 0.039 STOCK Coef SE -0.037 RETIRE Coef SE ** -0.004 0.001 0.204 0.008 0.006 0.014 ** 0.014 ** L ASSET -0.064 ** 0.048 -0.010 0.019 -0.015 0.018 0.014 MR:home -0.053 ** continued on the next page.000 0.012 0.021 ** CHAGE13 -0.019 0.011 0.103 -0.130 0.028 0.021 0.014 YEAR95 -0.015 0.034 0.154 ** 0.023 0.026 0.017 0.086 0.024 0.013 0.793 0.003 0.003 0.061 0.243 0.285 0.059 0.079 * RISKY 0.059 0.023 0.173 AGE -0.031 0.029 0.008 -0.020 -0.011 ** 0.054 0.003 0.001 0.033 0.015 -0.004 0.014 0.014 0.001 -0.109 0.027 0.017 CHILD2 -0.002 ** -0.038 * MR:+ wealth 0.015 0.013 * CHILD1 -0.039 0.015 -0.002 0.026 -0.009 0.381 0.030 0.027 0.010 0.033 0.018 0.004 ** MTR 0.068 0.

004 -0.020 0.017 0.014 0.005 0.014 CHAGE13 -0.011 0.037 0.014 0.027 0.285 -0.011 CHILD2 -0.054 MTR -0.030 0. RETIRE.365 0.008 RISKY 0.001 0.000 0.10: Renters: Continued ** ** 42 log Eh Coef SE 4.189 0.102 0.010 0.014 -0.022 0.016 0.580 0.035 -0. All variables are deﬁned in Appendix A.109 0.018 0.012 0.020 0.012 0.022 0.315 0.001 0.003 -0.030 0. and OTHER. STOCK.038 0. MR represents Mills Ratio.007 0.064 0.073 ** 0.061 0.014 -0.118 0.045 0.020 -0.002 -0.038 ** Notes: 1) ** indicates signiﬁcance at 1 percent level and * indicates signiﬁcance at 5 percent level.014 -0.001 0.067 0.033 -0. RESTATE.005 0. VEHICLE. The number of observations N=3.042 0.035 0.005 0.014 0.003 ** L ASSET -0. .002 0.173 0.030 0.001 0.365 -0.044 0.083 0.110 0.130 * AGE 0.002 * MARRIED 0.010 * YEAR98 -0.003 -0.021 0.009 YEAR92 -0.014 -0.036 0.015 FEMALE -0.010 CHILD1 0.069 0.029 0.004 0.017 0.334 0.Table 2.012 CHILD3 -0. 2) The text deﬁnes the assets called ACCOUNT.002 2 AGE /100 -0.004 0.017 0.004 0.020 0.001 0.011 0.010 L INCOME 0.2. HOUSE.577.011 -0.024 MR: home 0.038 0.009 * YEAR95 -0.062 0.032 0.001 0.004 0.030 0.125 -0.005 ** -0.033 ** MR: + wealth -0.038 0.006 ** ** RESTATE Coef SE CONSTANT -0.073 * ** ** ** OTHER Coef SE 0.

043 0.577 0.120 0.047 0.114 0.602 0.132 0.089 0.101 0.086 0.044 0.038 0.056 0.040 0.105 0.064 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 0.611 0.594 0.103 0.055 0.088 0.Table 2.079 0.095 0. VEHICLE.036 0.037 0.590 0.056 0.642 0.036 0.111 0.534 0.049 0.093 0.044 0.043 0.049 0.650 0.043 0.102 0.099 0.023 0.617 0.049 0.070 0.047 0.128 0.061 0.626 0.058 0.552 0. STOCK.063 0. and RESTATE.607 0. 43 .054 0.048 0.090 0.053 Notes: The text deﬁnes the assets called ACCOUNT.055 0.053 0.057 0.100 0.094 0.122 0.038 0.096 0.030 CHILD2 CHILD3 0.058 0. HOUSE.064 0.033 0.043 CHILD1 0.047 0.112 0. RETIRE.

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

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

More than 32 percent reported that ‘rainy days’ were an important motivation for saving. Most life-cycle fertility models incorporate some types of uncertainty. When disaggregated into age groups.1 percent. 46 . saving for retirement peaking between age 51 and 60. namely. This chapter also addresses a neglected topic in the childbearing literature.1 presents the proportion of households citing the following motives -‘rainy’ days. Wolpin [57] estimates a dynamic stochastic model of fertility within 4 See Hotz et al. 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. all of the four reasons reveal a hump shape: saving for ‘rainy days’ peaking in the 41-50 age group.4 For example.3). with 18 percent. retirement. Table 3. the eﬀect of income uncertainty on fertility over the life-cycle. This suggests that the relative importance of saving for each motive depends highly on the composition and the life-cycle stage of the household. respectively. saving for a home purchase peaking below age 31.7 and 4. The proportion of households citing saving for children’s educational expenses and home purchase were 5. [30] for a survey of life-cycle fertility models. and saving for the education of children peaking between age 31-40. The most frequently reported reason for saving was to increase resources for ‘rainy days’ such as unemployment and unexpected needs. The second most frequent reason was saving for retirement.saving behavior when estimating the eﬀect of children on savings.

there is evidence that income uncertainty has a direct eﬀect on fertility and family size. 6 Becker [1] suggests that children can be viewed as durable goods yielding psychic income to the parents.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. and thus the variance of income does not appear in the decision function. and consider a number of uncertainties such as the outcome of the contraceptive eﬀort. None of these studies.an environment where infant survival is uncertain.6 This chapter examines whether income uncertainty is associated with lower fertility and higher savings. even after controlling for the fact that saving is endogenous to the fertility behavior. 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. 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 . the time path of the husband’s income. The ﬁnding is consistent with previous studies that found little or no eﬀect of precautionary motive on savings. 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. Thus. However. In a study that addresses whether unemployment risk is an important factor in the timing of the purchase decision of durable goods. 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. this chapter can be viewed as a combination of those two prior works. and does not aﬀect savings of the rest of the population. and transitory shocks to the wife’s wage. however.

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

as suggested by the precautionary saving model. where η0 . First. This implies that households with higher income variability are less likely to have a child. liabilities. The 1983 SCF interviewed a 51 .where ∗ ∆CHILDit = 1 if ∆CHILDit > 0 = 0 otherwise.2) by OLS for all of the sample after substituting γ2 for γ2 for the fecund population ˆ and 0 for the other households.3 Data The data set used for estimation is the 1983 and 1989 panel of the SCF. 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. then they should also reduce their ‘consumption’ of children. The model is estimated using a two- stage estimation procedure described in Maddala [45]. Then I estimate the equation (3. Note that the model is identiﬁed even if u1it and u2it are not independent s c and Xit includes all the variables in Xit . and u2it is an error term representing unobservable variables. Maddala [45] shows that the resulting estimates of the coeﬃcients are consistent. 3. and η1 should be negative. η1 and η2 are parameters to be estimated. income and characteristics in 1983 and 1989.3). If consumers react to increases in uncertainty by cutting down their consumption. This data set contains detailed information on household assets.

balances outstanding on lines of credit and loans on consumer durables. The ﬁrst saving measure. where the ﬁrst includes liquid assets (checking assets. See Kennickell and Starr-McCluer [37] for a general description of the 1983-89 panel. However. home equity. credit card debt. Total liabilities include mortgage debt. An oversample of 438 high-income households came from this list in 1983. certiﬁcates of deposit and saving accounts). mutual funds. which makes it diﬃcult to distinguish between active and passive saving. includes capital gains. which will be called SAVE1. call accounts. automobile loans. substantial inconsistencies are observed between reported net investments in assets and measured changes in holdings.sample of 4. Total assets is the sum of ﬁnancial assets and nonﬁnancial assets.7 Household saving is derived as a ﬁrst diﬀerence in net worth between 1983-89. loans. stocks. 7 52 . 497 of them were reinterviewed in 1989. This information could be used to exclude both realized and unrealized capital gains. 103 households and 1. trusts. and 361 of them were reinterviewed in 1989. bonds. Keogh accounts. Net worth (NWORTH) is the total value of household’s assets minus its total liabilities. other real estate. and this amount is divided by six to get the annual household saving. In addition to a standard multi-stage area probability sample. a list sample was drawn from tax information provided by International Revenue Service. money market deposit accounts. The 1983 SCF consists of a dual sample. saving accounts. vehicles and other real assets like art and precious metals. business equity. The 1989 SCF also asked households to report major changes in asset holdings since 1983. other loans for property. cash value of life insurance and the later includes residential property. individual retirement accounts.

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

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

12 55 . 299 households out of 1. separation or the death of either head or spouse are excluded. divorce. See Kennickell and Starr-McCluer [37] for details. this exclusion or a similar one is necessary when working with means which are aﬀected by outliers. The sample selection criteria for the sample are as follows.12 To calculate an accurate measure of income uncertainty. 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. All variables are described in detail in Appendix B. 035 households with the heads between the age of 22 and 88 in 1983. Therefore. 000 is somewhat arbitrary.13 Table 3. Of the remaining 1. I use VRL and VRLI without an instrumental variable estimator.180 households. households that experienced a change in composition such as marriage.479 experienced a major change in family composition and were dropped from the sample. However.1.2 illustrates the composition of the sample in detail. In the panel 1983-89 SCF.) This eliminates the income variability or net worth change caused by family separation or family creation.to exclude for identiﬁcation is problematic. 000. those households with more than three missing or non-positive income values are dropped.e. The ﬁnal sample consists of 1. 13 The sample design in 1983 speciﬁcally excluded households with the heads under the age of 22.. A household is only included in the analysis if it remained intact between 1983 and 1989 (i. The variable ∆CHILD indiThe cut-oﬀ net worth of $10 million and saving of $600. 84 were dropped because of outlying net worth or saving values and 66 were dropped because of missing income values.

3 percent of the families experienced more than one birth during that time period-2. i.with and without an additional child . respectively.14 I refer to the households that had a child as households with an additional child. ∆CHILD = 1 if the household experienced at least one birth of a child.0 percent had three. and saved more compared to the other households in the sample. had less net worth in 1983. I use a probit model and a dummy variable to indicate the fertility choice instead of using a count data model.179 less than the mean net worth of the rest of the fecund houseOnly 3. 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. Also. mostly married (89.2 provides the variable means by household fertility of the fecund households. Columns (1) and (2) provide the variable means and standard deviations of all of the households in the sample and the fecund households.1 percent). Columns (3) and (4) of Table 3. Among fecund households. The average net worth for households with an additional child is $82. which is $37. fecund households are faced with higher income uncertainty than the rest of the sample.cates the fertility of the household between 1983 and 1989.611 in 1983.e..6 percent of the fecund households had a child between 1983 and 1989. 14 56 . Fecund households are headed by younger persons. but had higher income between 1983 and 1989.3 percent had two children and 1. Therefore.are plausible: households with an additional child are younger. 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. According to the SCF data. 18.

while fecund households without an additional child saved $7. 000 and above $60. 648 and $6. the increase is insigniﬁcant. According to SAVE1 and SAVE2. Also.191). 170 and $8. households with an additional child saved more than the rest of the fecund sample. The homeownership proportion for the rest of the fecund sample is higher in 1983 but compared to the households with an additional child. the bottom 25 percent of the distribution faces a lower income variability than the households in the 25-50 percent of 57 . respectively. 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. The measures of income uncertainty by household characteristics are given in Table 3. This suggests that households at the tails of the income distribution face higher uncertainty. The homeownership proportion among households with an additional child was 53. 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. from 67. 462.0 percent in 1983 to 72. When households are grouped by SAVE1. On the other hand. 690. Uncertainty estimates are greater for households with mean income below $10. we observe that households who had a child are faced with lower income uncertainty (0.8 percent in 1989. when we compare the income uncertainty of the two groups.5 in 1989. Households in the bottom 25 and top 10 percent of the SAVE2 distribution face higher income variability than the rest of sample. they saved $11.132 versus 0. 000.7 percent in 1983 and rose to 77.3.holds.

0 otherwise. The dependent variable is ∆CHILD = 1 if the household had a child between 1983-89. For other SAVE1 groups. Households who had a child between 1983-89 are diﬀerent from other households in terms of their saving.4 Estimation and Results Table 3. Diﬀerence between the savings of households with and without an additional child increase as the age of the household head increases. income and income variability. The right-hand variables include factors that are expected to aﬀect the demand for a child. 58 . 3. Considering the income uncertainty. Households that had a child save more. households with young and middle age heads that had a child face lower income variability. income uncertainty is lower except the top 10 percent of the distribution. Almost 36 percent of the households with heads below age 31 in 1983 had a child during the following six year period. income and income uncertainty by childbearing decisions and the age of the household head. When grouped according to the number of children. versus 16 percent of the households with heads between age 31-40. regardless of the uncertainty measure.4 represents household saving. and 1 percent among the age 40 and above group. Table 3.5 shows the results of the probit analysis of the fertility de- cision of the fecund sample. regardless of how savings were measured. for whom it reaches its highest value. and their permanent income is higher.the SAVE1 distribution. the estimates of income uncertainty decrease as the number of children living in household in 1983 increases.

a 0. middle (MIDDCH) and older (HIGHSCH) children in 1983 and the interaction terms for age (AGE83×HOWN83 and AGE×YOUNGCH).namely. The results in table 3. number of adults living in the household (NADULT). number of young (YOUNGCH). marital status (MARRIED). The probability of having another child is lower for a household that has a full-time working spouse or that is headed by a white person. Evaluated at the sample mean values. a dummy indicating whether spouse works full time at paid employment in 1983 (SPFULLT). whereas older households with small children are more likely to experience another birth. a household income measure (MEANINC. column (3) uses VRLI and mean income. The analysis in column (1) uses VRLI as the income uncertainty measure and permanent and transitory income as the income measures.1 increase in VRLI and VRL decreases the probability of having a child by 0. age (AGE). The coeﬃcient of age is highly signiﬁcant and negative. column (2) uses VLI and mean income and ﬁnally.5 and 0.6 percent. 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. PERMINC and TRANSINC). A married household is 8 to 10 percent more 59 . homeownership in 1983 (HOWN83). an income risk measure (VRLI and VLI). indicating that being one year older reduces the probability of having another child by 1 percent. race of the household head (WHITE). The signs of the age interaction terms imply that older homeowners are less likely to have a child. respectively.5 show that other things being equal.

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. a dummy indicating having 1983 net worth in the top 10 percent and bottom 25 percent (NWORTH90 and NWORTH25). is included as a right-hand variable with other factors that might aﬀect the saving behavior. namely. the behavior of the wealthy and the not wealthy are diﬀerent than the rest of the population. age interaction terms (AGE×NCHILD and age×∆CHILD) and income uncertainty interaction terms (VRLI (VRL)×NWORTH25 and VRLI (VRL)×NWORTH90). TRANSINC and MEANINC).6 and 3. compared to households headed by an unmarried person. Finally. 60 . the income uncertainty interaction terms show whether or not . both permanent income and mean income in columns (1) and (2) are signiﬁcant.6 and 3. The top 10 percent and bottom 25 percent net worth holdings in 1983 are included to address the saving behavior of the wealthy and the not wealthy. the number of adults and children living in the household (NADULT and NCHILD). age of the head (AGE).likely to have another child.7 for SAVE1 and SAVE2. The predicted probability of having a child. Columns (1)-(3) in tables 3. income (PERMINC. the probability of having a child seems to increase with income. a self-described expectation to leave a bequest (BEQUEST83). a measure of income uncertainty (VRLI and VRL). the change in the number of adults between 1983-1989 (∆NADULT).5. transitory income in column (1) has a negative eﬀect and mean income in column (3) is insigniﬁcant. However. in terms of the eﬀect of uncertainty. Similarly. ∆CHILD.

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.6 and SAVE 2 in Table 3. Both SAVE1 and SAVE2 reduce with the number of adults living in the household.500 less than the rest of the population as a result of an increase in income uncertainty. the results in Table 3.34. Before we examine the eﬀect of children on savings.The results for two measures of savings are quite similar (SAVE1 in Table 3. regardless of the measure. The estimated coeﬃcient of the propensity to save out of transitory income is 0. The results in Table 3.000 more than the rest of the sample. For example. Having 1983 net worth in the top 10 percent is associated with higher levels of SAVE1 and SAVE2 in all speciﬁcations.162 save about $15. households in the top 10 percent of the wealth distribution save almost $11. around $7. let us look at the eﬀect of the number of adults living in the household.6.24 in column (1) of Table 3.7 do not the support the idea that households save a higher fraction of transitory income.6 and Table 3.6 show that households in the top 10 percent of the wealth distribution and with VRLI of 0. evaluated at the sample average of VRLI. Changes in the number of adults between 1983 61 .162. which is 0. and it is signiﬁcantly lower than the estimated propensity to save out of permanent income. Saving also increases with income.500 less than the rest of the population whereas households in the bottom 25 percent of the wealth distribution save $3. respectively. which is 0.447.7). However.132-$8.

however. This result highlights the importance of the interaction between household composition and the age of the household head. the sample is restricted to only fecund households. and the fertility decision is modeled as an endoge- 62 . Households with children save less when the household head is below age 35 and save more above that age.555-$12.796 more) than household that do not expect to leave a bequest. age does not aﬀect the savings behavior of those without children. That is another impact of children on household savings.and 1989.6 and 3. Having an additional child reduces savings. we observe that the eﬀects of the children and age interaction terms decrease but do not disappear. The same is true for the number of children living in the household. households expecting to leave a bequest save signiﬁcantly more (around $12. 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. Also. For this. do not aﬀect SAVE1 but appear to reduce SAVE2.7. however being one year older and having an additional child increases savings. When we control for permanent income as in column (1) of Tables 3. Controlling for the number of children already living in the household. 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.

implying that younger households save less whereas older 15 See Maddala [45] for the models with self-selectivity.8. I take into account the fact that fertility decisions are endogenous to household saving decisions.297-4. The empirical results suggest that income uncertainty directly aﬀects the probability of having a child. average SAVE1 of the households that did not have a child is around $12. The direction of the response. In estimating this eﬀect.695-13.6.133 according to the results of the three regressions in Tables 3. 3. even after controlling for several demographic characteristics. Overall.15 The results are given in Table 3. 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.nous switching model. This ﬁnding suggests that the overall eﬀect of children on household saving is negative. 63 . changes in the number of children and children already living in the household reveal a signiﬁcant eﬀect on household savings. depends on the age of the household head. Finally. The results show that households would have saved around $2.066 less if they had chosen to have a child.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. however.

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

206 0. population as a whole. retirement. buying home and education of children respectively.Table 3. 1983 All By Age Below 31 31-40 41-50 51-60 61-70 70 and over Rainy Days Retirement Home 0.117 0.326 0.122 0.1: Saving Motives by Age Groups.383 0.176 0. 1983-1989.047 0.016 0.065 0. Observations are weighted to reﬂect the U.004 0.273 0.250 0.289 0.345 0.010 0.052 0.041 Children 0.047 0.011 0.323 0.000 Source: Survey of Consumer Finances.057 0.017 0.111 0.S.362 0. 65 . Notes: The table reports the proportion of households citing the selected motives as the most important reason for saving as ‘rainy days’.192 0.000 0.230 0. Number of observations: 1035.

747 0.891 0.1. 66 . All variables are described in Appendix B.456 0.2: Descriptive Statistics by Household Fertility Decision SAVE1 SAVE2 MEANINC PERMINC NWORTH AGE EDUC WHITE MARRIED NCHILD YOUNGCH MIDDCH HIGHSCH ∆CHILD NADULT BEQUEST HOWN83 HOWN89 VRLI VLI All HH 7699 6080 37668 36339 140628 45.7 0.001 0.516 2.180 0.938 0.120 0.1 12. All dollar values are in 1989 dollars.778 0.424 0.246 0.537 0.725 0.135 0.289 0. Observations are weighted using the sample weights.151 N 1035 509 422 87 Note: ∆CHILD=1 if the household had a child between 1983 and 1989 (0 otherwise).162 0.132 0.4 13.191 0.112 2.624 0. The table reports means of the variables.780 0.487 0.407 0.725 0.556 0.767 1.734 0.788 0.460 0.845 0.186 2.490 0.189 38.297 0.652 0.537 0.672 0.437 0.302 0.334 0.645 0.795 0.6 13.791 1.169 Fecund HH ∆CHILD = 0 8282 7648 6868 6462 43109 44122 40171 39921 112861 119790 36.1 0.Table 3.670 0.372 0.197 ∆CHILD = 1 11170 8690 38852 41210 82611 30.092 2.4 0.9 0.055 0.8 12.

2642) $30.6357) (0.490-7.2579) $7.1027 0.4881) (0.1184 0.0 0.4232) $10.0977 (0.818 10.1330 0.818 15.0988 (0.5066) 1 Child 17.7517 25.2117 (0.5537) $ 1.0 0.0 0.1269 (0. All variables are deﬁned in Appendix B.2290 0.3333) (0.492 15.6786) (0.0 0.1436 0.1832 (0.2449) (0.Table 3.2920 0.0 0.9431) (0.426) MEANINC Below $10.3334) $52.126-24.2299 0.0 0.999 37. 67 .433) 0.1479 (0.2013 0.1912 0.2134 0.446 15.1296 (0.2374 (0.4963) 0.7 0.492 10.2330 (0.4940) (0.0998 0.1527 (0.1088 (0.1462 (0.1 0.000 14.5245) 0.489 25.725 25.0 0.4780) $ 10.1889 (0. Observations are weighted using the sample weights (N=1305).057-30.232 25.446 10. and VLI is the variance of log income.2086) Above $314.2458) 0.162 (0.000-29.2 0.1194 (0.518-314.1284 (0.2171) 2 and more 27.0 0.10.1468 0.2269) (0.2713 (0.0902 (0.233-12.2825) (0.1363 (0.1559 0.0 0.999 36.1056 0.078) 25.4472) (0.000-59.265 25.1707 (0.1715 (0.1451 0.265-52.3980) Above $24.2371) $1.0 0.1312 (0.3362 0.2210) (0.3279) SAVE1 Below (-$1.3234 (0.726.0 0.056 25.1803 0.3230) $127.5512) SAVE2 Below (-$739) 25.1808) (0.1996) (0.1855 (0.3: Mean Income Uncertainty by Household Demographics % HH VRLI All 100 0.1.6129) (-$739)-1.7 0.2740) (0.2274) (-$1.000 12.2738) (0.0 0.2281 (0.6504) $10.5530) NCHILD No Children 55.0 0.2657) Above $60.125 25.078)-1.3376) VLI 0.4092) (0.1 0.0 0.9087) NWORTH Below $10.1095 0.5836) (0.0 0.1794) Above $30.2 0. VRLI is the variance of residual log income.169 (0.0 0.3524) (0.1716 (0.2391 (0.2973) Note: Standard deviations are given in parentheses.

422 0.5 24.1 4.0812 0.8 10.912 0.331 23. All variables are deﬁned in Appendix B.2261 Note: ∆CHILD=1 if household had a child between 1983-1989 (0 otherwise).628 0.0841 56.9 11.1727 3. and VLI is the variance of log income.1. VRLI is the variance of residual log income.899 0.619 3.1839 0.1369 0.636 27.528 4.769 0.272 9.477 40.1507 20.5 4.2920 6.812 6.049 5.3064 0.1774 0. 68 .2376 VLI 0.257 43.1408 0.4: Savings.220 34.3 8.Table 3.390 52.487 0.884 36. 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.

236 [-0.000 0.35 0.020** -0.420 YAGE 0.368 -0. ** indicates signiﬁcance at 5 percent level.006 TRANSINC/1000 -0.0553] [-0.134 0.001 1.00 0.998 -0.0787] [-0.130** 0.0095] [-.208** 0.Table 3.389 0.384** 0.331 HIGHSCH -0.1297] [ 0.627** 0.418 0.409 0.3338] [-0.0426] -0.3340] [-0.564 HOWN83 2.543 0.31 0.720* -0.0786] [-0.717* -0.154** 0.073 SPFULLT -0.0920] 1.232 HAGE -0.000* 0.060 -160.0550] [-0.5: Probit: Fertility Decision of Fecund Households (2) Coef StdE 1.714 NADULTS 0.019** 0.392** 0.0845] [-0.001* [ 0.225** [-.001 1.019** 0.1038] [-0.545 0.178** 0.175** 0.068 YOUNGCH -1.14 0.886** 0.049 Likelihood -152.0008] [-.0829] [-0.060 -2.047 -0.228 WHITE -0. YAGE is YOUNGCH×AGE.062 -160. .0094] [-.024** 0.357 0. and HAGE is HOWN83×AGE.623** 0.448 0.397 0.0594] 69 CONSTANT AGE VLRI VLI PERMINC/1000 0.0541] -0.063 0.132** 0.385** 0.1041] [-0.953** 0.229 -0. and * indicates signiﬁcance at 10 percent level.020** [-.844 MIDDCH -0.154** 0.980 -0.31 0.130 0.063 0.0577] (3) Coef StdE 1. Number of observations N=509.0001] [ 0.566 [-0.130** 0.208** 0.175** 0.166** 0.131 0.768 0.366 -0.203** (1) Coef StdE 1.0001] [ 0.0675] -0.001** 0.627** 0.369 -0.024** Note: Coef reports coeﬃcients and StdE reports standard errors.0613] 0.2375] -2. Marginal eﬀects are given in the brackets.186** [-.886** 0.0625] -0.0612] [0.1037] [-0.749** -0.0844] [-0.225** 0.024** 0.565 1.1040] [-0.0099] [-.369 [-0.047 [-0.060 [-0.077 0.20 Pseudo R2 0.410 0.021** -0.027** 0.001 MEANINC/1000 MARRIED 1.

Table 3.6: 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=1.22 ** ** ** ** ** Note: Coef reports coeﬃcients and StdE reports standard errors. ** indicates signiﬁcance at 5 percent level.035. and * indicates signiﬁcance at 10 percent level.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 .

Number of observations=1.18 -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 . ** indicates signiﬁcance at 5 percent level. and * indicates signiﬁcance at 10 percent level. .18 Note: Coef reports coeﬃcients and StdE reports standard errors.Table 3.18 223 57 -8264 3929 -24089 11699 686 319 11736 5772 -10074 5321 .035.

Table 3.695 12.154 10.527 10. 72 .672 8.375 422 422 422 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.133 12.8: 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.

While the percentage was lower for those in the lower income group (income below $35.900 (Choy and Henke [14]). Using the 1983-86 SCF. 65 percent of the parents contributed a positive amount to their children’s college costs as a gift. Of those contributing to their children’s college costs.Chapter 4 Saving for Children’s College Education 4.000). According to the 1996 National Postsecondary Student Aid Survey (NPSAS). 90 percent of dependent undergraduate’s parents contributed to their children’s college costs. parents contribute a signiﬁcant amount to their children’s college costs. Understanding the eﬀect of ﬁnancing children’s college education on household saving behavior is important at least for three reasons. and the average amount of their support was about $3. about 65 percent reported using some previous savings. for those in the higher income group (income above $70. and 80 percent reported using some current income. First. According to the 1987 NPSAS.1 Introduction The purpose of this chapter is to analyze an important life-cycle saving motive: saving for children’s college education.000) it was 98 percent (Presley and Clery [47]). Gale and Scholz [23] estimate that the annual ﬂow of parental 73 .

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

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

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

3 percent list education as the most important reason for saving. the motive of saving for children’s education has not been much investigated. Souleles [49] examines consumption of households as they pay for the college expenses of their children. and buying durable household goods. 15. buying a home and other reasons 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. The last column of Table 4. Other reasons for saving include saving for ordinary living expenses. 77 . While 35.1 shows the percentage of households reporting that they cannot or do not save.5 percent of households list ‘rainy days’ as the most important reason for saving. The SCF contains a question that asks the household’s most important reason for saving. saving for ‘rainy days. His results show that households smooth their consumption into the academic year and do not cut their consumption in the 6-9 months before the academic year starts. ‘rainy days’ (emergencies and unemployment).1 shows the percentage of households in the 1983 survey citing retirement.3).Although saving for retirement. income ﬂuctuations and bequests have motivated substantial research. education of children. The table provides the responses of the sample used in this chapter. Using the Consumer Expenditure Survey. medical and dental expenses. His ﬁndings are consistent with the life-cycle theory of consumption and saving. taking vacations and so on.3 percent list retirement and 5. Among the households saving for retirement. Table 4.’ home purchase and children’s education. One exception is Souleles [49]. ‘rainy days.’ is the most cited reason.

Controlling for the number of children. As the number of children increases.The percentage of households saving for ‘rainy days.1 also shows the percentage of households citing each saving motive by the number of children and net worth in 1983. 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. For example. 5.3 percent vs. 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.4 percent in the top 25 percentile report saving for retirement. a higher percentage of the households with one or two children report saving for children’s education than those with three or more children (8.7 percent of those in bottom 25 percentile of wealth distribution report saving for retirement. Table 4. 24. the eﬀect of the number of children on the percentage of households reporting saving for children’s education disappears. Among the households in the higher wealth groups. Among the households in the bottom 25 percentile of the wealth distribution.8 percent). This table shows that the number of 78 . the percentage of households citing ‘rainy days’ and other reasons as the most important reason decreases. while only 2. the percentage of households saving for retirement increases with wealth. among households with 1 or 2 children.’ retirement and other reasons show a systematic trend relative to the total number of children. and the percentage of households citing retirement as the most important reason increases.

I also obtain predictions concerning the simultaneous determination of family size and college expenditures per child. The data from the 1983-86 SCF is used to estimate two equations in which the dependent variables are household savings and educational expenses. Also. a household with a 43 year old head expecting to have $2. Further. households save for their children’s college expenditures. We continue to observe this eﬀect even after controlling for the household wealth. Households with higher income and wealth expect to have higher educational expenses. the empirical ﬁndings provide an answer to why saving is concentrated among wealthier households. The remainder of this chapter is organized as follows. and they save in advance for these expenses. and the amount of savings increases with the age of the household head.000 more than it would had it not expected to have any college expenses. Section 4. 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. Using the actual college expenses reported in the SCF. In this chapter.000 in children’s college expenses saves $8. 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. 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. Other things constant.2 an79 .children has a signiﬁcant eﬀect on saving motives. the eﬀect of anticipated educational expenses on household savings are estimated.

second-period consumption. Parents choose ﬁrst-period consumption. For simplicity.alyzes a model of the quality-quantity interaction of fertility with household savings.3) (4. e. per capita college investment is assumed to be equal for all n children. Section 4.6. c2 . Section 4. investment to each child’s education. 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. a couple earns y1 .3 describes the 1983-86 SCF. Finally. a summary and conclusions are presented in Section 4.4 provides a framework for the empirical analysis of the interaction between savings and college expenditures.2) (4. and the number of children to maximize U = U (c1 . In the ﬁrst period. chooses to have n children. Section 4.2 A Model of Saving for College This section considers a world in which individuals (parents) live for two periods. In the second period.5 estimates the determinants of college expenditures and uses these estimates to investigate the eﬀect of expected college expenditures on household savings.1) . and the family consumes together c1 and saves A to earn interest at the rate of r. n) subject to c1 = y1 − A c2 = y2 + (1 + r)A − πen 80 (4. 4.

Ue is the marginal utility of children’s education. educational expenses (e) and the number of children (n).5) (4. respectively.8) where γ is the elasticity of substitution. which results in an increase in accumulated assets. e.7) where U1 and U2 are the marginal utility of consumption in the ﬁrst and second periods.6) (4. Substituting (4.5) can be written as follows: 1 y1 − A = (1 + r) γ−1 . This expression implies that an increase in educational expenses decreases the second-period consumption relative to ﬁrst-period consumption. a decrease in second-period consumption is likely to decrease the ﬁrst-period consumption. y2 + (1 + r)A − πen. y2 + (1 + r)A − πen (4.4) where the three choice variables are accumulated assets (A). 81 . and Un is the marginal utility of family size.2) and (4. The ﬁrst-order conditions are −U1 + (1 + r)U2 = 0 −πnU2 + Ue = 0 −πeU2 + Un = 0 (4.1) yields the following unconstrained maximization problem: U = U (y1 − A.3) into (4.where π is the price of education. equation (4. If the utility function is CES with equal elasticity of substitution between all arguments. Since the right-hand side is a constant. n) (4.

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. then U2 is a convex function.7). 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. let us assume that the second period wage income y2 is stochastic. household saving can be associated with two diﬀerent saving motives: saving for uncertainty about future income (precautionary saving) and saving for children’s education. The empirical speciﬁcation of the model described below controls for precautionary saving while it estimates the eﬀect of educational expenses on household savings. When uncertainty about future income is assumed. In this case. 3 82 . 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.3 The combination of a positive third derivative of the utility function and uncertainty about future income reduces consumption in the ﬁrst period. E1 [U2 ] exceeds U2 [E1 ]. This interdependence implies an inverse relationship between the number of children and educational expenses. If the third derivative is positive.6) and (4.

The ﬁrst measure. the data does not diﬀerentiate between children away in college or living on their own and with former spouses. The SCF contains detailed information on household assets. including those not living in the household. savings and other control variables.4. This variable includes children of previous marriages living with former spouses. 4 83 .822 of these households were reinterviewed. The variables used in the empirical analysis are classiﬁed into four groups: fertility.4 The college expenditure variable (COLLEXP) captures the quality dimension associated with the expenditure per child. The college expenditure variable is the outlay of college education per child. Unfortunately. income and demographic characteristics. I use the number of children attending college and the number of years they attended to normalize college expenditures. In 1986. Household savings are measured in two ways. SAVE1. 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. The 1983 survey contains interviews from a random sample of 3. liabilities.824 households and a high-income supplement of 438 households. 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. In 1986. 2. The respondents were also asked how many years of college their children completed from 1983-85.

education. race. certiﬁcates of deposit and saving accounts). other real estate. loans. 1983. educational expenditures and fertility decisions. trusts. individual retirement accounts. vehicles and other real assets like art and precious metals. cash value of life insurance and the later includes residential property. marital status. Household permanent income (PERINC) is deﬁned as the predicted income in 1985 obtained from regressing the log of total income on age. saving accounts. gender of the household head and other household characteristics. credit card debt. bonds. I estimate household permanent and transitory income. mutual funds. Net worth (NWORTH) is the total value of household’s assets minus its total liabilities. In order to exclude unrealized capital gains on the primary residence. a second measure of savings (SAVE2) is used. Total liabilities include mortgage debt. 5 84 . gender and the educational level of the household head. race. automobile loans. 1984 and 1985. These are age. business equity. where the ﬁrst includes liquid assets (checking assets. and the demographic characteristics associated with tastes (urban residence. Transitory income (TRINC) Total assets is the sum of ﬁnancial assets and nonﬁnancial assets.5 SAVE1 includes the realized and unrealized capital gains. and whether or not the household head is willing to undertake risky investments). Using the reported household income for 1982. other loans for property.is the change in net worth between 1983 and 1986 divided by the number of years. home equity. balances outstanding on lines of credit and loans on consumer durables. and the educational level of the spouse. reasons for borrowing and saving. Keogh accounts. stocks. Whenever a household did not buy or sell a house that was the family’s primary residence. the value of the primary residence in 1983 is kept constant. Other controls include variables that aﬀect savings. money market deposit accounts. call accounts.

005.931 and $3. Table 4. Permanent and transitory incomes in 1985 are $25.000 are excluded to avoid the diﬃculty of modeling the relationship between educational expenditures and savings. the average expenditure is $2. Estimating the relationship between savings and educational expenditures is complicated for families who experienced a major change in composition such as marriage and divorce. The sample is restricted to families that did not change composition from 1983-86. households with family income above $100. the typical household saves $5. it saves $4.811.1 gives a detailed deﬁnition of the variables used in the estimation of the model. The sample is also constrained to include only the households with nonretired household heads and their spouses if the head is married. Also.690 households. The average household in the sample is headed by a forty two year old married high school graduate and includes two children. For households with nonzero college expenditures.575 in 1986 dollars.806 and according to second measure. Households with retired household heads are assumed to be in the life-cycle stage of dissaving. Table 4.2 presents summary statistics of the variables used. The head of the median household reports that it is all right to borrow money for educational expenses. These restrictions leave us with a sample containing 1. Appendix C.is the diﬀerence between reported income in 1985 and estimated permanent income. The average household net worth in 1983 is $81. respectively.296.3 presents average household savings and college expenses by 85 . According to the ﬁrst measure of savings.

the number of children in college is inversely related to the expenditure per child as predicted by the quantityquality model.9) (4.10) . As the number of children in college increases.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. However.077.the number of children attending college. Savings of households with children in college increase with net worth. 4. 25-75 percentile and top 25 percentile) spend less per child as the number of children attending college increases.3 also breaks down savings and college expenses by the number of children in college and net worth in 1983. The data show that college expenses increase with net worth. household savings increase with the number of children in college. college expenditures per child decreases. Table 4. household savings increase with the number of children in college. Except the households in the bottom 25 percentile of the net worth distribution with two or more children attending college. Households in the top 25 percentile of the wealth distribution with two or more children in college save on average $18. The data show that households continue to save while children are in college. more than twice as much the households in the same wealth group with one child in college. However. Households in all three wealth groups (bottom 25 percentile.

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

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

The average CHILD is 3.5 reports estimates of the equation (4. SEMERG.controlling for marital status.690 households in the sample. The right-hand variables also include other factors that might aﬀect the college expenditures. the amount of college expenditure decreases with the number of children. and permanent and transitory income (PERINC and TRINC). Households with children attending college between 1983-86 are included in the estimation of the Tobit regression. I use the estimates of the regression to predict the completed household fertility when the household head is 55 years old (CHILD). The instrumental estimate of the coeﬃcient on the number of children is almost three times as large as the OLS estimate (-$459 vs. 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. and 252 reported contributing a positive amount to their children’s college expenses. Table 4. 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 .9). -$187). Of the 1. Columns 1 and 2 contain the results with CHILD and columns 3 and 4 contain the results with CHILD. SCHEDUC and SHOME). 338 had a child attending college between 1983-86. households with spouses working full-time and with high school and college degrees have fewer children. As predicted by the quantity-quality model. namely. age (AGE) and education (COLLEG) of the household head.03.

789 per child.436.093 per child. While the average contribution of households in the bottom 25 percentile of wealth distribution is $1. respectively. the average contribution of the top 25 percentile is $3.5 show that increases in permanent and transitory income increase the level of expenditures for educational expenses. ˆ σ (4. Households citing saving for children’s education as the most important reason for saving spend more than other households. Households with heads who believe that it is all right to borrow for educational expenses have higher expenditures.variables as follows: ˆ ˆ δ1 ∗ Φ((δ1 ni + x1i κ1 )/ˆ ). Table 4. and δ1 and κ1 are the estimates of δ1 and κ1 . I use estimates of the Tobit model and the expected completed fertility. The average COLLEXP is $1. The last two columns of Table 4. to calculate the expected college expenditures (COLLEXP ). Estimated contributions of the households with children in college are very close to the actual expenses. ˆ Using the approximation.6 show SAVE1 and SAVE2 for households with 90 . CHILD. Estimates in Table 4. Households citing saving for retirement and buying a home as the most important reason for saving spend less on children’s education.6 presents actual and estimated college expenses by household net worth in 1983. The amount of contribution to children’s college education increases with wealth. an additional child results in a drop of $317 in expected college expenditures at the mean of values. Φ is the standard normal cumuˆ ˆ lative distribution.12) where σ is the estimate of the standard error.

Table 4. households in top 25 percentile of the wealth distribution save almost ﬁve times more if they have a child in college. The estimates of SAVE1 and SAVE2 are very similar. Explanatory variables include age (AGE). However. a dummy indicating whether or not the household had a windfall greater than $3.and without children in college. the data in Table 4. households with greater wealth save more if they have a child attending college. Columns 1 and 2 contain the estimates for SAVE1. and columns 3 and 4 contain the estimates for SAVE2. gender (FEMALE) of the household head. a dummy indicating whether the household head is willing to take risky investments (RISKY). the coeﬃcient of expected college expenditure (COLLEXP ) is negative and the coeﬃcient of age interaction term (AGE×COLLEXP ) is positive.000 between 1893-86.3.7 presents the eﬀect of expected college expenditures on household savings. Households in the bottom 25 percentile of wealth distribution save signiﬁcantly less than those without children in college.6 show that wealthier families contribute more to their children’s education and continue to save while their children are in college. Interestingly. which are retirement and emergencies (SRETIRE and SEMERG). permanent and transitory incomes (PERINC and TRINC). and the number of children attending college between 1983-86 (NCHCOLL). In estimates of both equations. two other reasons for saving. indicating that an increase in expected college expenditure raises 91 . Similar to Table 4. nonurban residence (NSMSA) and dummies indicating household net worth in 1983 (NWORTH25 and NWORTH75).

the number of children attending college does not signiﬁcantly decrease household savings. Finally. The eﬀect of transitory income on both measures of savings is positive and signiﬁcant.1 shows the eﬀect of the age of the household head on SAVE1. households with heads who are willing to undertake risky investments save $7.7. Households citing saving for retirement as the most important reason save more. This result does not necessarily mean that households are not saving for children’s college education. the data does not have detailed information on the years that children were attending college between 1983 and 1986.833 more than other households.savings after age 28. showing that households save approximately 39 percent of their transitory income. Using the estimates in Table 4. saving for emergencies does not signiﬁcantly aﬀect savings.000 to college expenses and compares it to what it would have saved. However. the ﬁgure ﬁrst calculates savings of a typical household expecting to contribute $2. Unfortunately.398 less than those in the middle of the wealth distribution . citing a motive other than retirement or emergencies as the most 92 . Finally. had it not expected to contribute a positive amount. Permanent income increases both SAVE1 and SAVE2. Figure 4.493 more and households in the top 25 percentile save $11. Also. By typical. households in the bottom 25 percentile of the wealth distribution save $2. For each age group. household savings are calculated in ﬁve year intervals. 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. I mean a household in the 25-75 percentile of the wealth distribution.

important saving motive.000 between 1983-86. for example.7 show that the eﬀect of saving for retirement on household saving is positive and raises household savings by $4. This ﬁgure only shows that controlling for other factors.000 college expenses increase with age.894. If the household does not expect to contribute to children’s college expenses. The eﬀect of expecting to contribute $2000 on household savings is $8.6 Conclusion This chapter examines the eﬀect of saving for children’s college edu- cation on household savings. 4. Saving motives change with age and household composition. headed by a male.000 at the age of 43. savings decline to zero at the age of 43. the eﬀect of anticipated college expenses on savings is positive and signiﬁcant. I also obtain predictions 93 . This striking result is due to the assumption that this household is assumed not to cite saving for retirement as the most important reason. 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. and it increases with the age of the household head. The results show that savings of the household with an anticipated $2. this will increase its saving by $4. who is not willing to undertake risky investments and did not receive a windfall greater than $3. If we assume.894. The household is assumed to have average permanent and transitory incomes for their age group. that this household starts saving for retirement when the household head is 43 years old. The results in Table 4.

By focusing on household savings. Other things constant. 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. households smooth consumption into the academic year and do not cut consumption in the 6-9 months before the academic year starts. 94 . The results are consistent with the predictions of the life-cycle theory of saving and consumption that households save in advance for expected expenses.concerning the simultaneous determination of family size and college expenditure per child.000 at the age of 43. The main ﬁnding of this chapter is that households save in advance for children’s college expenditures. I analyze the eﬀect of educational expenditures on two diﬀerent measures of savings. which show that despite large college expenses. I estimate expected expenditures on children’s college education. The model uses the expected expenditures and other control variables that aﬀect savings to estimate an equation of savings. the diﬀerence between savings of households with and without college expenses can be as high as $8. 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].

Tabulations are weighted using the sample weights.401 0.053 0.382 0.049 0.032 25-75p 75 to 100p Source: Survey of Consumer Finances.543 0. Notes: This table reports the proportion of households citing the selected motives as the most important reason for saving.341 0.023 0. SRETIRE: saving for retirement.037 NWORTH 0-25p 0 1-2 3 or more 0 1-2 3 or more 0 1-2 3 or more 0.339 0. SHOME: saving to buy a home. .153 CHILD 0 1-2 3 or more 0.000 0.244 0.042 0.009 0.440 0.377 0.043 0.341 0.345 SEMERG SCHEDU 0.058 0.021 0.391 0.351 0.016 95 0.471 0.381 0.337 0.049 0.455 0.383 0.000 0.000 0.074 0.010 0.057 0.404 0.027 0.120 0.380 NOSAVE 0.053 SHOME 0.310 0.066 0.102 0.043 0.278 0.397 0. SEMERGE: saving for ‘rainy days. SOTHER: saving for other reasons and NOSAVE: cannot/does not save.064 0.070 0.087 0.264 0.057 0.013 0.027 0.060 0.369 0. 1983.115 0.007 0.279 0.023 HH 0.004 0.355 0.1: Saving Motives By the Number of Children SRETIRE 0.035 SOTHER 0. The number of observations N=1690.042 0.063 0.330 0.223 0.083 0.009 0.079 0.002 0.082 0.469 0.029 0.212 0.’ SCHEDU: saving for the education of children.033 0.016 0.068 0.Table 4.

50 BLACK 0. Notes: Tabulations are weighted using sample weights.53 0.08 161860.43 COLLEG 0. All dollar values are reported in 1986 dollars.08 0. The number of observations N=1690.13 0. 1983-86.13 35397.75 TRINC 3296. 96 .43 HIGHSCH 0.68 AGE 42.86 0.35 WINDF 0.45 Source: Survey of Consumer Finances.43 14.17 0.37 NSMSA 0.11 12491.1.24 0.48 BEDUCAT 0.33 MARRIED 0.Table 4.24 0.86 PERINC 25931.28 RISKY 0.28 0.36 SAVE1 5806.47 SAVE2 4811. Deviation CHILD 2.2: Descriptive Summary of Variables Variables Mean Std.10 FEMALE 0.41 33402.65 0.32 15127.32 2817.47 2.14 COLLEXP> 0 2005.64 NWORTH 81575. All variables are described in Appendix C.

97 . The number of observations N=1690. 1983-86.Table 4. Notes: NCHCOLL shows the number of children attending college between 1983-86.3: Savings and College Expenses by the Number of Children in College SAVE1 SAVE2 COLLEXP NCHCOLL 0 1 2 or more NWORTH 0-25p 5041 6661 12357 4206 5277 10317 0 2236 1657 0 1 2 or more 0 1 2 or more 0 1 2 or more 3762 4961 1829 5804 6032 7707 4870 7745 18077 3705 5005 1695 4348 5305 5695 4551 5312 15577 0 905 797 0 1882 951 0 2937 2355 25-75p 75-100p Source: Survey of Consumer Finances. All dollar values are reported in 1986 dollars. Tabulations are weighted using sample weights.

022 0. Variables are described in Appendix C.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.090 ** -0.062 ** 1.038 0.Table 4.145 ** 0.038 0.389 0. Notes: ** indicates signiﬁcance at 5 percent level.408 0.032 0.128 ** 0.461 0. 98 .435 0.004 ** -0.964 0.057 ** -0.039 ** -0.717 0. 1983-86.1.078 0.062 ** 1690 2. and * indicates signiﬁcance at 10 percent level.106 0.293 Source: Survey of Consumer Finances.48 0.43 -2971.097 ** 0.126 ** -0.930 0. Error -1.134 ** 0.

9 -45.Table 4.5: Tobit Estimates of College Expenditure Equation Coeﬃcient Std.9 2912.5 18.7 ** 1391. Error -601.746 -2429.9 ** -187.8 473.5 22.7 1467.8 232.8 ** -1103.9 ** 67.5 -1335.5 551.0 0.0 9.1 -4936.6 408.2 2524.9 -458.4 1589.0 ** 72.9 557. Notes: ** indicates signiﬁcance at 5 percent level.4 92.7 338 .6 1452. Error Coeﬃcient Std.1 1063. 99 .7 * 997.4 10.3 2444.8 -372. All variables are described in Appendix C. 1983-86.2 19.4 23.4 555.1.81 CONSTANT AGE CHILD CHILD PERINC/1000 BEDUCAT SRETIRE SEMERG SCHEDUC SHOME COLLEG TRINC/1000 SIGMA N OBS Proportion of + observations Log L ** ** * ** ** * ** ** -2429.3 134.8 -7.70 Source: Survey of Consumer Finances.6 133.3 609.8 468.2 88.5 472.6 -1124.1 611.1 72.1 550.6 -407.0 ** 2905.0 409. and * indicates signiﬁcance at 10 percent level.9 ** -4903.

02 0 7. Notes: Tabulations are weighted using sample weights. The number of observations N=1690.6: 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.52 0 5. 1983-86.29 1436 44.Table 4. 100 .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.59 2334 17.65 0 1. CHCOLL=1 if the household has a child attending college between 1983-86 (0 otherwise).

8 -615.9 1728.5 -1310.3 0.9 11080.2 3.6 2026. .5 2409.0 5607.3 -774.3 2016.8 3199.4 2434.1 2796.8 ** 6820.0 -11398. Error 22618. and * indicates signiﬁcance at 10 percent level.8 2783.6 ** -9329.4 ** 336.3 10.3 0. Notes: ** indicates signiﬁcance at 5 percent level.8 3349.2 -10.0 2460.6 -315.107 SAVE2 Coeﬃcient Std.6 388.5 0.2 3422.2 3.2 5041.1 3139.1 4894.5 2493.5 .Table 4.7: 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.6 1516.6 10944.0 -790.8 160.1.3 * 3028.8 140.3 416.0 7833.3 ** 309.8 761.9 139.4 2538. Error ** 22327.2 1820.8 4.3 2954.0 382.0 1271. All variables are described in Appendix C.5 1325.7 ** 0.2 ** -9.8 382. a Predicted value of the variable from Tobit regression of educational expenditures.6 407.1 4.8 .2 ** -1284.084 Source: Survey of Consumer Finances.1 * 4679. 1983-86.3 ** 10.8 163.0 1642.9 2474.

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

Appendices 103 .

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

Number of children younger than age 22 who live in the household. I then apply the appropriate tax rate schedule to calculate the household’s tax liability. See Appendix A.1. See Appendix A. =1 if the household head is a single female. The diﬀerence in total tax liabilities divided by 100 gives the marginal tax rate. INCOME ASSET MTR Eh Total assets of the household. AGE MARRIED FEMALE NCHILD Age of the household head in years. it is the opportunity cost of owning a house. =1 if the household head is married. A. =1 if three or more children are living in the household. CHILD0 CHILD1 CHILD2 CHILD3 =1 if no children are living in the household. The marginal tax rate is computed by running this method twice . =1 if two children are living in the household. Consumption demand for housing. 105 .yields the taxable income. =1 if only one child is living in the household.2 Name Deﬁnition of Variables Description Estimated earnings of the household head and spouse at the age of 45.3. Marginal tax rate of the household. For homeowners.once with AGI and then with AGI minus 100.

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

permanent income is calculated from Zi βp . ˆ is zero.in year t are Ln Eit = Ln Yi + e(AGEit − 45) + uit . c(AGEi ).2) and estimate the resulting earnings equation using each wave of SCF separately. Their permanent income is adjusted for 107 . I assume that α = 0.1) and (A. I combine (A. and is assumed to be uncorrelated with εpi ). The selectivity-adjusted earnings functions are estimated for the sample consisting of individuals with nonzero earnings. AGEit is the age of the respondent and uit is the log of the transitory component (uit has zero mean 2 and variance of σu . with one exception.3) 2 2 2 where α = σs /(σs + σu ). For heads with zero ˆ earnings. Since age-earnings proﬁle e(AGEit − 45) and c(AGEi ) cannot be identiﬁed for this estimation. ˆ (A. The same procedure is used for spouses. I assume that the cohort eﬀect. King and Dicks-Mireaux [40] use outside data to impose a cohort eﬀect. to get an estimate of εpi . and this provides the ˆ estimate βp . (A. I calculate the minimum variance estimator of εpi using εpi = α(εpi + uit ). Following King and Dicks-Mireaux [40]. Earnings equations are estimated separately for household heads and spouses. εpi and c(AGEi ). Instead. To construct an estimate of permanent income. Finally.2) where e(.5.) measures the log of the age-earnings proﬁle. I need the estimates of βp .

108 . 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.non-participation at diﬀerent stages of the life cycle as follows: ˆ Yiw = Yi P rob(Ei > 0).

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

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

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

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

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

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