Copyright by Tansel Yilmazer 2002
The Dissertation Committee for Tansel Yilmazer certiﬁes that this is the approved version of the following dissertation:
Household Saving Behavior, Portfolio Choice and Children: Evidence from the Survey of Consumer Finances
Daniel T. Slesnick, Supervisor Don Fullerton Maxwell B. Stinchcombe Peter J. Wilcoxen Jacqueline Angel
Household Saving Behavior, Portfolio Choice and Children: Evidence from the Survey of Consumer Finances
by Tansel Yilmazer, B.S., M.A.
DISSERTATION Presented to the Faculty of the Graduate School of The University of Texas at Austin in Partial Fulﬁllment of the Requirements for the Degree of DOCTOR OF PHILOSOPHY
THE UNIVERSITY OF TEXAS AT AUSTIN December 2002
United States Code.UMI Number: 3110711
UMI Microform 3110711 Copyright 2004 by ProQuest Information and Learning Company. MI 48106-1346
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I would like to thank my advisor. for his support. Special thanks go to Asli Kes. Adam Winship. I would also like to thank my committee members Don Fullerton. Daniel Slesnick. Mala Velamuri. Angela Lyons. G¨rkem Celik. Anne Golla.’ First. guidance and encouragement. Steve Trejo. Matias Fontenla.Acknowledgments
I am grateful to many people who shared the best and worst moments of ‘my dissertation years. patience. Anne Gorney. Peter Wilcoxen and Jacqueline Angel for their valuable feedback and comments. Maxwell Stinchcombe. Finally. o ¸ and Vivian Goldman-Leﬄer for their stimulating conversations and friendship.
. I am indebted to my family for their love and believing in me over these years. I wish to thank Fikret for always being there for me. in spite of the thousands of miles between us.
Ph. this dissertation examines the relationship between having children and the motives of saving: (i) to hold assets because of the return they provide. 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. Tansel Yilmazer. Slesnick
Using the Survey of Consumer Finances (SCF). such as owner-occupied housing. risky assets and interest-bearing accounts. As a result of the portfolio constraint. 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. v
.’ and (iii) to accumulate for anticipated future needs.D. such as educational expenses. Portfolio Choice and Children: Evidence from the Survey of Consumer Finances
Publication No. 2002 Supervisor: Daniel T.Household Saving Behavior. The University of Texas at Austin. (ii) to build up reserves as a precaution for a ‘rainy day. The ﬁrst chapter examines how the number of children living in the household aﬀects the way households allocate their wealth across diﬀerent assets.
Further. Also. The third chapter examines the eﬀect of ﬁnancing children’s college education on household savings. Using a life-cycle model that incorporates precautionary motives for saving. savings for college increase with the age of the household head. income uncertainty has little eﬀect on household savings. The results are consistent with the predictions the lifecycle theory of saving that households save in advance for expected expenses to smooth their consumption.homeowners decrease the share of the portfolio invested in retirement assets as the number of children increases. and after controlling for family size. the empirical model estimates the expected expenditures on children’s college education and investigates the eﬀect of expected college expenses on household savings. this chapter extends the empirical work on precautionary savings.
. The results show that parents save for college expenses of their children. the second chapter investigates the relationship between household saving and fertility decisions. 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. Using the actual college expenditures reported in the 1983-86 SCF. The results show that households with higher income uncertainty are less likely to have a child.
5 Conclusion . . The Relationship between Fertility and Saving . . .2 Empirical Model . . . . . . . .3 Data . . Estimation and Results . . . . . .1 3. . . . . . . . . Data . . . . . . . . . . . . 2. . . . . . 2. . . . . 3. . . . . . .1 Theory . . . . . . . . . . . . . . . . . . . . . . . . . . .3 3. . . . . . . . . . . . . . . . on Household . . . . . . . . . . . . Chapter 3. . . . . 2. . . . . . .5 The Eﬀect of Precautionary Motives Saving and Fertility Introduction . . . . . 2. . . . . . . . . . . . . . . . 2. . . . . . . . . . . .4 3. . . . . . . . . . . . . . . . . . . .1 Introduction . . . . . . . Do Children Aﬀect Household Portfolio Allocation? 2. . . . . . .2. .2 The Model .Table of Contents
Acknowledgments Abstract List of Tables List of Figures Chapter 1. . .4 Estimation and Results . 2. . . . . . . . . . Conclusion . . . . . . . . . . .2 3. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2. . . . . . . . . . . . . . . . . . . Introduction
iv v ix xi 1 6 6 12 12 15 17 24 30 44 44 48 51 58 63
Chapter 2. . . . . . . . .
. . . . . . . . . . . . . .2 Deﬁnition of Variables . . . . . . .2 A Model of Saving for College 4. . . . . . . . . . . . . . . . . . 111 Bibliography Vita 113 121
. . . 4. . . . Appendix for Chapter A. . .1 Deﬁnition of Variables . .
. . . Appendices
73 73 80 83 86 88 93 103
Appendix A. . . . Appendix for Chapter 3 109 B.1 Deﬁnition of Variables . . . . . . . . . . . . . . .
. . . . . . . . . .4 Empirical Speciﬁcation . . . . . . 4. . . . . . . . . . . . . . . A. . .
. . . . . . . . . . 104 . . . . . .
. . . . . . . . . Saving for Children’s 4. . . . . . .
. . . 106
Appendix B. . . . . . . . . .5 Estimation and Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105 . . 4. 4. . . . .1 Introduction . . . . .6 Conclusion . . . .1 Estimating Marginal Tax Rates . . . . . . . . . . . . . . . 109 Appendix C. . . . . . . . . . . . . .3 Data . . . . . . . . . . . .
. . . . . . .3 Estimating Permanent Income . . A. Appendix for Chapter 4 111 C. . . . . .Chapter 4. . . . . . . . .
2 104 .
. . . . . . . . . . Descriptive Summary of Variables . . . . . . . . . . 1998: Continued . . . . . . . .11 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
. . .10 2. . . .9 2. Results from Probit Estimation . . Expenditure on Housing. . . . . . . . . . . . . . . . . . Income and Income Uncertainty by Age and Fertility Probit: Fertility Decision of Fecund Households . . . . . . . Regressions of SAVE2 on Income Uncertainty with Endogenous Fertility Decision . . . . . . . . .3 3. . Mean Asset Shares. . .5 2. . . . . . . . . . Mean Asset Shares by Year . . . . . . Mean Asset Shares. . . . . . . . . . . . . . . . . . . . . . . Renters: Continued . . . . Results: Asset Shares and Housing Expenditure of Homeowners Homeowners: Continued . . . . . . . . . . . . . . . . . . . . . . . . .7 2.1 2. . . The Eﬀect of a Change in the Fertility Decision on SAVE1 . . 1998 . Mean Income Uncertainty by Household Demographics . . .3 2. . . . . . 1983 . .4 2. .2 4. . . . . . . . Savings and College Expenses by the Number of College . . . . .7 3. . . . Results: Asset Shares and Housing Expenditure of Renters . . . . . . . . . .1 4. . Portfolio Shares for Assets by the Number of Children and Age Saving Motives by Age Groups. . . . . . . . . . . Regressions of SAVE1 on Income Uncertainty with Endogenous Fertility Decision . . . . . . . . . . . . . . .6 3. . .5
Descriptive Statistics by Year . . . . . . . . . . . . . . . . . . . . . . . . Children in . Tobit Estimates of College Expenditure Equation ix . . . . . . . . . . .8 2.3 4. . Savings. . . . . . . . Descriptive Statistics by Household Fertility Decision . . .4 3. . . .2 2. .4 4. Poisson Regression: Number of Children . . . . . .2 3. . . . . . . . . . . . . . . . . . . . . Saving Motives By the Number of Children . 1998 . . . .8 4. . . . . . . . . . . .1 3. . .5 3.6 2. . . . . . . . .List of Tables
2. . .
. . . . . . . . . . . . . . . .6 4. . . Eﬀect of Anticipated College Expenses on Savings . . .4. . . . . . . . . . . . . . .7
College Expenditures and Savings by the Number of Children in College .
List of Figures
The Importance of Educational Expenses on Savings . . . . .
Chapter 1 Introduction
Raising children is costly with their housing, educational and other expenses. To meet the costs of raising their children, parents use both current income and intertemporal transfers. Children living in the household, therefore, are likely to aﬀect the level of household savings, portfolio composition and the life-cycle proﬁle of savings. Using data from the Survey of Consumer Finances (SCF), this dissertation examines the relationship between children and the motives of saving: (i) to hold assets because of the return they provide, (ii) to build up reserves as a precaution for a ‘rainy day,’ and (iii) to accumulate for anticipated future needs, such as educational expenses. Most U.S. households hold a large portion of their wealth in the form of owner-occupied housing. According to the 1995 SCF, 65 percent of households are homeowners, and the value of an average homeowner’s property is 60 percent of its total assets. Owner-occupied housing diﬀers from other types of wealth in its dual role as both a consumption good and an investment good. Since households cannot separate the level of consumption of housing services from investment in housing as an asset, the optimal level of owner-occupied housing may be higher than the optimal level for households only interested
in long run returns. The demand for housing services is likely to increase with the number of children living in the household. Therefore, the consumption constraint can be even more binding for households with children. Chapter 2 uses the 1989, 1992, 1995 and 1998 SCF to investigate how the number of children living in the household aﬀect the portfolio choice between housing and other assets. The portfolio allocation of homeowners is compared to that of renters by taking into account the portfolio constraint imposed by the consumption demand for housing. The empirical model also examines the eﬀect of children on the demand for housing services and homeownership decision. The results show that the number of children increases the housing consumption of homeowners as well as the share of the portfolio allocated to owner-occupied housing. As a result of the portfolio constraint, homeowners decrease the portfolio share of retirement assets as the number of children increases. Low levels of retirement savings of U.S. households have generated signiﬁcant concern in the last twenty years. The ﬁndings of Chapter 2 show that households with children decrease the portfolio share for retirement savings considerably while they increase the portfolio share for housing. If the return on housing is less than the return on retirement accounts, there is a hidden cost of children. Explaining the size of the portfolio eﬀect allows a better understanding of the cost of children. Also, changes in housing programs or tax deduction rules for mortgage interest payments inﬂuence the portfolio allocation of households with children considerably by increasing or decreasing the 2
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. however. Chapter 3 investigates the relation between household saving and fertility decisions. 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. household saving show that saving rates are higher for married couples with no children and lower for those with children. The data on U. Also. having an additional child decreases savings of households with young heads and increases savings of those with older heads. this chapter extends the empirical work on precautionary saving. 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. The ﬁndings. 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. The results of the empirical model in Chapter 3 show that households with higher income uncertainty are less likely to have a child at a point in time.cost of homeownership. are not consistent with the predictions of the precautionary saving model that suggests agents faced with uncertainty about future income increase their savings. This ﬁnding is consistent with the life-cycle theory of saving and consumption and shows that household composition is an important factor 3
Given the rapidly rising cost of college tuition. Also. savings for college education increases with the age of 4
. Chapter 4 examines the eﬀect of ﬁnancing children’s college education on household savings. Third. parents contribute a signiﬁcant amount to their children’s college expenses. Using the actual college expenditures reported in the 1983-86 SCF. Second. The college ﬁnancial aid system imposes an implicit tax on the savings of households that are potentially eligible for ﬁnancial assistance. about 65 percent reported using some previous savings.of life-cycle 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. Of those contributing to their children’s college costs in 1987. The results show that parents save for college expenses of their children. the quality-quantity model of fertility behavior assumes that parents have preferences both for the expenditure per child and the number of children. According to the 1996 National Postsecondary Student Aid Survey. This chapter uses the amount of parental expenditure on children’s college education as a measure for child quality. 90 percent of dependent undergraduate’s parents contributed ﬁnancially to the costs of their children’s education. Understanding the eﬀect of ﬁnancing children’s college education on household saving behavior is important for at least three reasons. First. Chapter 4 estimates the household’s expected expenditures on children’s college education and investigates the eﬀect of expected college expenses on household savings.
the 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.
King and Leape . 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. and Sund`n and Surette  e for gender eﬀects. the literature has focused on the impact of demographic variables such as the eﬀect of age.
. and interest-bearing accounts.Chapter 2 Do Children Aﬀect Household Portfolio Allocation?
2. risky assets. Conversely. race and gender of the household head on the portfolio composition.1 Introduction
Empirical studies of household portfolio composition have identiﬁed large diﬀerences in portfolio allocation choices of diﬀerent demographic groups.1 The inﬂuence of children living in the household on the portfolio composition has not been yet discussed. Chiteji and Staﬀord  for race. and Ioannides  for age eﬀect. households with children may purchase more housing than households with no children or they may have a higher probability of owning a home. Parents may choose to invest part of their household portfolio in stocks to meet the rising costs of a college education. they may hold most of their ﬁnancial assets in riskless
See Poterba and Samwick . So far. Jianakoplas and Bernasek . For example.
1995 and 1998 SCF. If households with children allocate a larger share of their portfolio to owneroccupied housing. households with children may decrease the portfolio share for other assets considerably while they increase the portfolio share for housing. Speciﬁcally. Understanding the size of the impact of children on household portfolio allocation is intrinsically interesting. paying particular attention to the impact of children on the demand for housing services and homeownership decision. 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. The failure of households with children to invest suﬃcient assets in retirement accounts may lead to a lower retirement wealth. and (iii) the housing expenditure of homeowners and renters. households have generated signiﬁcant concern in the last twenty years. as the result of higher consumption demand for housing. Using data from the 1989. 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. 7
.form to decrease their families’ exposure to risk. Low levels of retirement savings of U.S. 1992. I focus on how the number and age of children living in the household aﬀect (i) the homeownership decision. It has also important policy implications. (ii) the portfolio shares for housing and the other assets that homeowners and renters hold. Also. this chapter investigates the eﬀect of children on household portfolio composition.
Brueckner analyzes the behavior of homeowners. While the dual role of housing has been recognized. and King and Leape  examine the 1960-62 Michigan Surveys of Consumer Finances. Exceptions are the theoretical model of Brueckner . households cannot separate the level of consumption of housing services from investment in housing as an asset. its impact on the portfolio choice between housing and other assets has not been discussed much. and the ownership of their principal residence determines the level of consumption of housing services.2 In the presence of tax distortions and transaction costs. Wolﬀ  uses the 1983. households hold a large portion of their wealth in the form of owner-occupied housing. the general equilibrium model of Berkovec and Fullerton  and the numerical analysis of Flavin and Yamashita . and the value of an average homeowner’s property is 60 percent of its total assets.S.Most U. Owner-occupied housing diﬀers from other types of wealth in its dual role as both a consumption good and an investment good. In his model. 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. 1989. According to the 1995 SCF. 65 percent of households are homeowners. Households with children are likely to have a higher demand for housing services and the consumption constraint can be even more binding. Explaining the size of the portfolio eﬀect allows a better understanding of the cost of children.
See Henderson and Ioannides  and Berkovec and Fullerton 
. 1992 1995 SCF. and both report that owner-occupied housing accounts for about 30 percent of household assets.
In Berkovec and Fullerton. the homeowner’s optimal portfolio is ineﬃcient in a mean-variance framework. Their simulation concentrates on the eﬀect of taxes on the tenure choice and owner-occupied housing. households decide on tenure and quantity of housing taking both consumption and investment motives into account. 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.an investment constraint requires that the quantity of housing owned is at least as large as the quantity of housing consumed. Flavin and Yamashita use numerical methods to calculate the mean-variance eﬃcient frontier. 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. His model analyzes the resulting distortion of the eﬀect of this investment constraint on the portfolio choice of homeowners. Harun et al. For example. The results of his model show that when the constraint imposed by housing is binding. The literature on housing demand has recognized the role of children on the tenure choice and the demand for housing services.  show that
. Neither of these studies explicitly analyzes the determinants of the consumption demand for housing and the portfolio share for housing. Robst et al.5 percent.  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.
households typically invest in only a few of the assets available in the economy. Goodman and Kawai  ﬁnd that larger households prefer more housing. 401(k)s.an additional child increases the probability of owning a home by around 8 percent. Besides housing. only 41 percent of households held stocks directly or indirectly in IRAs. Demographic characteristics such as age. Ihlanfeldt  reports housing demand estimates obtained separately from two samples-recent movers and nonmovers. The information cost of monitoring and managing a portfolio is suggested as an important reason for holding riskless assets. marital status. Among recent movers. 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. as noted in Goodman . the importance of the current and expected family size diﬀers between owners and renters: while renters demand more housing with an increase in family size and expectation of an additional child within the next nine months.S. their results show that the presence of children in school has either an insigniﬁcant or a negative eﬀect on the demand for housing. and race of the household head are shown to be signiﬁcant factors that reduce the level of information cost that would be suﬃcient to
. However. these variables do not aﬀect the housing demand of homeowners. deﬁned beneﬁt pensions and mutual funds. however. For example. according to the 1995 SCF. Many studies have investigated the reasons that most households choose to hold incomplete portfolios. U. After controlling for the household size.
Their ﬁndings show that age and marital status of the household head signiﬁcantly aﬀect the probability of asset ownership. Bertaut  uses the 1983-89 SCF to analyze the eﬀect of household characteristics on portfolio allocation. For example. His results show that household characteristics such as age and education of the household head are signiﬁcant in explaining the probability of owning stocks. The 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. In the conditional demand equations. King and Leape  analyze a model in which investors choose to hold incomplete portfolios. This chapter aims to do so by examining the eﬀect of the number and the age of children on household portfolio choice.discourage households from investing in risky assets. and they estimate equations for both the probability of owning an asset and its demand conditional upon ownership. the eﬀect of age and marital status appears to be signiﬁcant only for some of the assets. however. Chiteji and Staﬀord  link independent young African-American adults back to their parents. The empirical model compares the portfolio allocation of homeowners to that of renters. The results show that the number of children has a positive and signiﬁcant eﬀect
. Using the Panel Study of Income Dynamics. taking into account the eﬀect of children on the consumption demand for housing. Their ﬁnding is that parents who held stocks are more likely to have children who hold stocks as young adults. Children living in the household have not been the focus of any study examining the portfolio choice of households.
The remainder of this chapter is organized as follows.on the probability of owning a home.2. and how much to allocate to other risky assets.4.1
Theory This section examines the behavior of a consumer deciding whether to
rent or own a home.2 introduces the theoretical model and discusses the empirical speciﬁcation of the model.5. A summary of the ﬁndings and concluding remarks are presented in Section 2. As a result of the portfolio constraint imposed by the housing demand of children. homeowners decrease the portfolio share in retirement accounts while they increase the portfolio share in housing. 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.
2. The estimation results are reported in Section 2. Section 2. The number of children also increases the housing demand of homeowners. Children living in the household also aﬀects the portfolio choice of renters. The consumer maximizes a multiperiod utility function. Controlling for the number of children and other variables. Following Brueckner  and 12
. Renters invest a smaller share of their portfolio in interest-bearing accounts with an increase in the number of children. 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.3 describes the data set and the variables used in the empirical work.2
2. Section 2.
. I assume that third and subsequent periods are buried in the indirect utility function given remaining wealth at the beginning of the second period. U gives the utility from the current consumption. with a0 being the riskless asset. J.. V is an indirect utility function. The ﬁrst period budget constraint is given by
p o hc h
aj .. hc ) + δE[V (R + y)].1)
where y is future labor income. and consumption in future periods that depends on the random total return R from the investment portfolio.Henderson and Ioannides . housing services (hc ). If the consumer purchases a house. (2. and δ is the discount factor. 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). and owner-occupied housing earns rh . 1. E gives the expected utility. The consumer’s objective function can be written as follows: U (c. j = 0. The dollar amount of asset j purchased is denoted aj . .
(2. 1. so that aj ≥ 0.. . J. The only source of uncertainty is assumed to be from returns on J + 1 assets and owner-occupied housing (h). A consumer in this economy is assumed to obtain utility from the current consumption of a single nondurable good (c). Short selling is ruled out for all assets including housing. The j th asset earns a gross return of rj .2)
. and h ≥ 0.
since h is equal to zero for renters. θjk is the covariance of returns between asset j and k. . The total return of the
portfolio is given by R=
rj aj .J. j = 1. 2. and θjh is the covariance of returns between asset j and housing.6)
and the standard deviation
J J K
σ = (θhh h + 2
haj θhj +
aj ak θjk )1/2 . respectively.7).
is the price of a unit of housing for renters.7)
where θhh and θjj . . then the ﬁrst period budget constraint is given by
c = w − po hc − r
aj . For renters.. J. For homeowners.
(2. the total portfolio return R is a normal random variable with the expected value
R = rh h + r0 a0 +
r j aj
(2. h = 0 in equations (2..6) and (2.where w is her initial wealth and po is the current price of a unit of housing. the return on housing and the return on other assets are assumed to be normal variables with the expected values rh and rj . In the model. h The total return of the portfolio is given by
R = rh h +
rj aj .
(2. are the variances of rh and rk .3)
If the consumer rents a house... j = 1.
. The empirical model described in the next section focuses on the interaction between these two stages of decision making. the asset levels aj . are chosen optimally with hc and σ held constant.4).7).. J. hc (and thus σ) is chosen optimally.2 Empirical Model The joint determination of whether own a house (H=1) or not (H=0).7) and decides to own or rent a house comparing the utilities in two outcomes.2).6) and (2. and to owner-occupied housing (sh ) is modeled as follows. hc ) + δ V (R + σz + y)φ(z)dz. I rewrite the objective function (2.. .9)
where Xh is a vector of year dummies and characteristics that are associated 15
. and a∗ . First. J. J. that maximize (2. 2. (2. The consumer also decides on c∗ .1) in terms of R. this problem can be solved in two stages. c j (2. a household determines whether to own or rent a house: H = 1 if Xh β1 + ε1 > 0 = 0 otherwise. (2..2. and the standard normal variable z as follows: U (c. that maximize (2. .. 1. For both homeowners and renters. j = 0. (2.Following Fama and Miller  and Brueckner . h∗ . In the second stage.3).) is the standard normal density function..8)
where φ(. In the ﬁrst stage. j = c j 0.. (2. σ. 1.1) subject to (2. . 1. how much to spend on housing (Eh ).8) subject to (2. h∗ and a∗ . and shares of wealth to allocate to each asset j (sj ). The consumer’s problem is to choose c∗ .6) and (2. j = 0. (2.5).
the household decides on the share of portfolio allocated to each asset and housing. In the ﬁrst stage.. J. log Eh = Xc βoc + εoc . j = 0.. . 1. log Eh = Xc βrc + εrc .11). εrj .9) . Separate equations are speciﬁed for homeowners and renters. Similarly.. and the error terms in equations (2. j = 0... . j = 0. βrj .with the probability of owning a house. J sj = Xβoj + εoj sh = Xβh + εh If owner. Second. 1. βoc and βrc are the parameter vectors to be estimated.. and also the housing expenditure:
j = 0..10) (2. and ε1 is an error term. I use ˆ ˆ φ(X β1 )/Φ(X β1 ). In the second stage.. βoj . φ(X β1 )/(1 − Φ(X β1 )) is used as a regressor for renters in estimating (2. as a regressor in estimating (2. βh ..(2.
. where φ and Φ are probability density and cumulative distribution of the standard ˆ ˆ normal distribution. a probit model of the tenure choice in equation (2. β1 is a parameter vector. .10) for homeowners.9) provides an estimate of β1 .11) are assumed to have a joint normal distribution. εoc . (2. εh . J.. respectively.. and εrc are the error terms. and εoj .11)
where X and Xc are vectors of household characteristics and year dummies.. The two stage method described in Lee and Trost  is used to estimate the model. 1. . 1. J sj = Xβrj + εrj sh = 0 If renter.
the supplement consists of 866 out of 3. 6) RESTATE includes the market value of seasonal residences and other property.3 Total assets are grouped into six categories: 1) ACCOUNT includes all holdings of checking accounts.519 out of 4. in 1992. Investments in businesses are not included in total assets because they generate an income that is diﬃcult to separate from earnings. 1995 and 1998
The data for this study are taken from the 1989.299. Each survey consists of a representative sample of the U. certiﬁcates of deposit. and other deﬁned contribution plans. saving accounts. population and a supplement of high-wealth households drawn from Internal Revenue Service ﬁle of high-income returns. income. 5) VEHICLE is the value of all the vehicles the household owns. population.2. The SCF constructs sample weights to blend the supplements with the area-probability sample to get a more representative sample of the U. For owners. 1.409 out of 4. 4) HOUSE is the market value of owner-occupied housing.143 households.906. 2) STOCK includes all assets held in stocks.S. in 1995. and other assets like arts and precious metals. 401(k)s. money market deposit accounts. all types of bonds. a triennial survey conducted by the Federal Reserve Board. Keogh.480 out of 3. 3) RETIRE includes IRAs. call accounts.
. and 7) OTHER includes trusts. cash value of life insurance. The consumption demand for housing is computed for renters and homeowners as follows. 1. and demographic characteristics. The survey contains detailed information on household portfolios.309 households. and in 1998. and mutual funds. 1992. 1. the cost of housing services depends on
In the 1989 SCF.S.
is the rate of increase in the median sale price of houses in that year. Property tax rates and mortgage interest payments are reported in the SCF. The interest rate. (2.the gross value of the residence (G). I impute them using detailed account information on the sources of income and demographics for each household. The calculation of marginal tax rates is described in Appendix A. To calculate the housing expenditure by using equation (2.015 for each of the sample years. I make several assumptions. The inﬂation rate. Following Henderson and Ioannides . the interest rate (r). the rate of increase in the nominal price of housing (ρ) and the overall inﬂation rate (π). maintenance and depreciation costs (d). is assumed to be the interest rate on treasury bills. households that neither rent nor own their homes are excluded for lack of information to cal18
. For renters. is the annual inﬂation rate calculated using the CPI-U deﬂator. the annual rental expenditure reported in the SCF is used as the consumption demand for housing. I assume an annual rate of depreciation of d=0. First. A few restrictions are imposed on the sample. the income tax rate (τ ). and the rate of increase in house prices.12). π. ρ.12)
This formulation assumes that homeowners claim tax deductions for property taxes and mortgage interest payments. the mortgage interest payment (m). Since marginal tax rates are not reported in the SCF. r. the property tax rate (τp ).1. The housing expenditures (Eh ) of homeowners are then deﬁned as Eh = [(1 − τ )r + d + (1 − τ )τp − (ρ − π)]G − mτ.
households with the highest 0.culate housing expenditure. 1995 and 1998. households with female heads are headed by single females. 183.1 percentile of the weighted wealth distribution in the 1989. 214.3. 317 and 309 households were neither renters nor owners and were dropped from the sample.1 percent weighted wealth holdings in each wave of the SCF are dropped. and 1998 SCF. The calculation of permanent income follows King and Dicks-Mireaux  and is described in Appendix A. 2. 6 The SCF deﬁnes the head of the household to be the husband for all married households. 116. The same pattern is true for permanent income (INCOME). or (iii) it owns part or all of the farm/ranch on which it lives on. 1992. respectively.773 and 3.4 Second.6 However. As a proxy for permanent income. 127. In 1989. 3.509. a co-op or a townhouse association. to avoid the inﬂuence of extreme outliers on the regression.1 shows the summary statistics for all the variables used in the estimation. 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.2. respectively. respectively. marital status (MARRIED) and gender (FEMALE) of the household head and the fraction of homeowners (HOMEOWN). 3. Sample demographics show the age of the household head (AGE). 5 Of the remaining households. 1992. 1995 and 1998. 1995.
. 1992.989 observations. 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.900.807 households in 1989. both mean and median wealth (ASSET) have risen since 1992. The variables are described in detail in Appendix A. 209 and 193 were in the 0. (ii) it owns both the mobile house and the site. most of which have not changed much over time. Therefore. I take the estimated earnings of the household head and the spouse at the age of 45 and an individual-speciﬁc eﬀect.5 The ﬁnal sample consists of 13. Table 2.
but it rose to 13. VEHICLE and RESTATE. The ﬁrst column shows the share of households in diﬀerent income. Table 2.6 percent in 1998). there is a steady growth in the portfolio share for STOCK and a steady decline in the portfolio share for RESTATE since 1989.3 percent in 1989 to 11. The increases in ACCOUNT.was higher for homeowners in 1992 than in other years due to the decline in house prices in that year.75 in 1995 and stayed the same in 1998. STOCK and RETIRE in 1998 oﬀset the decline in HOUSE. The second largest asset in the households’ portfolios is VEHICLE (18.5 percent in 1998. First.2 percent in 1995.83 in 1989 to 0. the composition of households’ portfolios reveals the importance of housing as an asset. wealth and children (the number of children living in the household) groups. Assets in these accounts increased from 5.2. This suggests that households have substituted ﬁnancial assets for nonﬁnancial assets. the share for RETIRE increases sharply. HOUSE is the most important asset.2 presents interesting changes in household portfolio structures over time.7 percent of total assets in 1989 to 10. representing 39. The portfolio share for ACCOUNT declined from 14.4 percent of total assets in 1998. The percentage of households with all children older than age 13 (CHAGE13) has stayed the same since 1992. 20
. followed by ACCOUNT. The average number of children (NCHILD) living in the household declined from 0.3 presents housing expenditures of homeowners and renters in 1998. Second. age. Table 2.2 percent in 1998 due to an increase in the portfolio share for saving accounts. As shown in Table 2.
accounting for 57. For homeowners.5 show the household portfolio composition in 1998 by household permanent income.4 shows the portfolio shares of assets that homeowners and renters hold. wealth. VEHICLE is the third largest asset (7.0 percent). Average housing expenditures for homeowners and renters are presented. renters spend more on housing than owners.The second column indicates the percentage of each of these groups that are homeowners. in the remaining two columns of the table. The average housing expenditure is $7. the expenditure on housing declines after the age of 65. For homeowners. and the number of children.5 percent of total assets) followed by ACCOUNT (26. age of the household head. It also increases with the number of children. there are marked diﬀerences in household portfolios of renters and owners. Among households with wealth below $250.4 and 2. wealth and the number of children in the household. 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. The housing expenditures of renters and homeowners also increase with income. for renters. The percentage of households who are homeowners increases with income. For renters.030 for renters. First. Since the primary residence is the largest part of homeowners’ wealth.8 percent of total assets) following
. The ﬁrst row of Table 2. Tables 2.000 and income below $50. wealth and the age of the household head. VEHICLE is the most important asset held (41.9 percent. reaching a peak among households with two children. respectively.042 for homeowners and $6. however.000. it declines after age 50.
2 percent of total assets while housing accounted for only 22. as shown in Tables 2. Also. Also. the portfolio share for ACCOUNT almost doubles both for homeowners and renters over the age of 65 compared to 50-64 year old group. portfolio composition of households with heads over the age of 65 diﬀers considerably from other age groups’ portfolios. but they hold only 42.4. For higher levels of income. The portfolio shares for other assets such as STOCK. Several ﬁndings are worth noting. For example. RETIRE and RESTATE are almost equal for renters and owners. First. of the households with income below $15.2 percent).6 percent of total assets in housing.3 and 2.6 percent. while the housing share of portfolio declines. accumulation in STOCK relative to other assets increases over age 65. Another noteworthy ﬁnding is that the portfolio shares for STOCK and RETIRE for both homeowners and renters rise with income.7 percent are homeowners. 86. we observe striking diﬀerences in the composition of portfolios by the level of wealth. For homeowners. 42.000.RETIRE (10. the fraction of households who are homeowners increases. Table 2. Not surprisingly. the share of the portfolio allocated to STOCK rise at a rapid rate with wealth. the share of the portfolio allocated to RESTATE and for all households. Of the households with income above $100.4 also presents the life cycle patterns in household portfolios.7 percent are homeowners holding 75. This suggests that households with heads over age 65 substitute 22
. in contrast.9 percent of their total assets in housing. For example. STOCK is the most important asset category with a share equal to 25.000. among homeowners that have wealth exceeding $1 million.
Tables 2.3 investigates the eﬀect of children on the tenure choice. age and wealth are similar.3 percent for those with three or more children. wealth. 60. Table 2. and table 2. housing accounts for 56.liquid assets for nonﬁnancial assets. Table 2.0 percent of the wealth for households with no children.5 shows the portfolio shares by the number of children living in the household. For example. the presence of children increases the share of the portfolio allocated to vehicles. Finally.5 looks at the link between children and shares of assets in both renters’ and homeowners’ portfolios. Second. Homeowners invest a smaller share of their portfolio in interest-bearing accounts and stocks with an increase in the number of children.9 percent for households with 2 children. Children are likely to aﬀect the portfolio structures in two ways. While portfolio composition diﬀers considerably between renters and homeowners. and the second is their eﬀect on asset shares of portfolios conditional upon ownership. The portfolio share for owner-occupied housing increases with the number of children. the portfolio share for HOUSE declines with age among the households headed by persons below age 65. and age groups.4 and 2. but it stays steady after age 65.5 reveal striking diﬀerences in portfolio structures across income. The results indicate that the number of children living in the household aﬀects the portfolio shares for assets and 23
. and 65. The table indicates a strong relation between children and the share of portfolio allocated to housing. Also. the relative changes in portfolio shares of assets by income. The ﬁrst is their eﬀect on the choice of tenure.
and RESTATE in the estimation of the model. Thus. I drop one group of assets. Of 13. HOUSE. STOCK. and the disturbance covariance matrix is singular. Portfolio choice theory has shown the importance of age. and include ACCOUNT. The empirical model below investigates the eﬀect of children on both asset shares and homeownership decision. Age and age-squared of the household head are included to capture a possible change in portfolio behavior related to the life cycle. permanent income and wealth in determining the asset shares in household portfolios. the marital
93 households in 1989. 100 in 1995.
2. Moreover.898 households.4
Estimation and Results
The resulting set of equations constitutes an endogenous switching
model in the form of a multivariate regression model. Dummy variables indicating the number and the age of children living in the household are included in X. The other variables in X are chosen to be consistent with previous empirical studies.
. Previous research also indicates that a household’s marginal tax rate (MRT) has an eﬀect on its asset allocation decisions. 410 report zero wealth holding. Then I solve for the parameters of OTHER from the other equations. Portfolio shares of the J + 1 assets and housing sum to one.7 I exclude those households from the sample and correct for sample selection. and 106 in 1998 had zero wealth holding. OTHER.the probability that a household owns a home. VEHICLE. RETIRE. 111 in 1992.
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
For these assets. Since 1995. The estimates of the Mills ratios for renters are signiﬁcantly diﬀerent from zero 28
. for example. Selfselection occurred in households’ tenure choice. and a lower share for VEHICLE. STOCK.to HOUSE and VEHICLE. RESTATE and OTHER. the 1998 portfolio share for RETIRE is 5. should they choose to buy homes.10 report coeﬃcients of the selectivity variables.10 present the estimates of the equations (2. The eﬀect of children is less pronounced for renters than for homeowners.7-2. Tables 2.9 and 2. homeownership would not have the same eﬀect on renters. The coeﬃcients on the selection terms in equations for ACCOUNT.11) for renters. It leads to a decrease in the share allocated to ACCOUNT.0 percent higher in renters’ portfolio. Compared to 1989. An increase in total assets leads to an increase in the share for STOCK. More permanent income is associated with a higher share for ACCOUNT. RETIRE and RESTATE. The portfolio share for RETIRE increases with age until the age of 58. the share for ACCOUNT decreases. renters have shifted toward RETIRE in their portfolio. As renters have two or more children. RETIRE and HOUSE for homeowners are all statistically signiﬁcant. respectively. and the share for VEHICLE is signiﬁcantly higher for households with three or more children. 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. RESTATE and OTHER and a decrease in the share for ACCOUNT and VEHICLE. Tables 2. while the portfolio share for ACCOUNT and STOCK decreases until the age 40 and 43.
Homeowners with one child have 11.10 present the estimates of the housing expenditure equation. 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. having more children increases the housing expenditures of homeowners by only 3.11 presents the estimates of shares for assets that a typical homeowner holds. This implies that other than in regards to these three assets. the negative selectivity bias for renters’ implies the reverse: renters spend less on housing compared to average household of the sample had it chosen to rent. The housing expenditure of homeowners increases 8. Table 2. all of the children in the household are younger 29
. and RESTATE. On the other hand.8 and 2. the expenditure on housing increases with the number of children. there were no signiﬁcant diﬀerences in the average behavior of the two groups prior to home purchase. but the number of children has no eﬀect on renters’ expenditure. The age of the children in the household has no eﬀect on the housing expenditure of renters nor homeowners. RETIRE.3 percent with the second child.2 percent. After the second child. For homeowners.9 percent higher housing expenditure than homeowners with no child. The last two columns in Tables 2.for ACCOUNT. I mean a household headed by a white married. For both renters and owners. 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. By a typical household.
The number of children has a negative eﬀect on the portfolio share for RETIRE.5
Using the 1989. The household head is willing to take risky investments and holds mean wealth ($188. As mentioned above. conditional on the tenure choice. this chapter investigates
how the number and the age of children living in the household inﬂuence the portfolio composition of households. more is invested in RETIRE. VEHICLE is the second most important asset in the portfolio when the household head is 30 years old. Using a
. an increase in the number of children increases the probability that a household owns a home. 1992. The chapter examines the impact of children on the homeownership decision and the constraint of consumption demand for owner-occupied housing.11 include both of these eﬀects.
2.160) and permanent income ($46. First.than age 13. children have two eﬀects on the portfolio structure of households. and its importance in the portfolio increase with the number of children living in the household. 1995 and 1998 SCF. The portfolio shares of assets calculated in Table 2. and the share allocated to RETIRE becomes the second largest in the portfolio. 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. Second. HOUSE is the most important asset. As the household head reaches middle age. children change the demand for each asset.690) and has a 15 percent marginal tax rate. At all ages.
and the portfolio share for housing increases. the ratio of retirement accounts to total assets in renters’ portfolios does not signiﬁcantly decrease with the number of children. for households with children.S. households are saving enough for retirement. 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. This result suggests that. the policies that change the cost of housing and aﬀect ownership decision inﬂuence not only the portfolio share for owner-occupied housing but also the portfolio share for retirement assets. One direction for further research is to include the liabilities and bor31
. the consumption demand for housing is higher than the investment demand.switching regression model that takes into account the consumption demand for housing. Therefore. As homeowners have more children. Since households cannot separate the level of consumption of housing services from their investment in housing as an asset. the portfolio share for ﬁnancial assets such as interest-bearing accounts and retirement accounts decreases. 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. the ratio of housing to total assets increases as the number of children increases. Considerable research has focused on whether U. However. the chapter compares the determinants of portfolio allocation of homeowners to that of renters.
rowing constraints of households into the model of portfolio choice. Most households ﬁnance their home purchases with mortgage debt.
. The impact of children on the portfolio share for housing may be an important determinant of household mortgage debt.
3 0. 2) All dollar values are reported in 1998 dollars.65 0.829 116.807 0.12 0.61 3.509 0.66 0. 1989-1998.97
48.8 0.65 0.75 0.64 0.9 0.97
Source: Survey of Consumer Finances.750 0.773 0.151 203. permanent income and net worth.319 50.658 222.28 0.51 2.28 0.660 12.58 0. All variables are deﬁned in Appendix A.27 0.900 0.158 0.985 6.59 0.328 206.97
48.Table 2.50 3.815 258.14 0.664 6. The text deﬁnes total assets.55 3.164 0.154 0.80 0.968 46.97
48.191 92.59 0.684 92.2. Notes: 1) Tabulations are weighted using sample weights.59 0.
.12 0.525 101.83 0.28 0.131 5.75 0.054 49.5 0.695
47.11 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
047 0. RETIRE.094 0.143 0.059 0.059 0. Notes: 1) Tabulations are weighted using sample weights.050 0.072 0.196 0. and OTHER.043 0. VEHICLE.067
0.394 0.197 0.112 0.
. STOCK.105 0.068 0.410 0. 2) The text deﬁnes the assets called ACCOUNT.076
0.057 0.043 0.130 0. HOUSE.208 0.186 0. RESTATE.072
Source: Survey of Consumer Finances.415 0.053 0.432 0.2: Mean Asset Shares by Year 1989 Portfolio Shares ACCOUNT STOCK RETIRE HOUSE VEHICLE RESTATE OTHER 1992 1995 1998
0.132 0. 1989-1998.
61.456 11.024 6.42 78.883 Above $100K 8.09
64.08 22.3: Expenditure on Housing.496
6.438 8.93 1.081 $30-50K 29.065 7.04 5.931 6.Table 2.587 95.90 12.89
6.28 9.081 6.843 9.72 78.078 7.764 6.78 7.46 72.748 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
22.35 42.293 $15-30K 22.29 68.22 7.847 15.741 7. 2) HH represents all households.17 15.69 3.183 7.976 7.79 64.677 6.546 80.486 95.803 8.475 5.195
5.973 6.29 4.030 Income Below $15K 10.50 51. HO represents homeowners and RR represents renters.72 14. Notes: 1) Tabulations are weighted using sample weights.
32.002 6. 1998 Eh 1998 dollars %HH %HO HO RR All households 100 66.55
12.90 19.72 3.38 29.49
36.03 21.26 21.400 5.378 $50-100K 29.43 9.263 5. 1998.555 93.40 34.54 5.12 80.22 64.69 4.866 4.564 5.77 67.391
Source: Survey of Consumer Finances.24 86.
401 0.074 0.453 0.413 0.014 0 0.083 0.080 0.149 0.213 0. 1998 ACCOUNT STOCK RETIRE HOUSE VEHICLE HO RR HO RR HO RR HO RR HO RR 0.042 $50K-100K 0.109
All households Income Below $15K 0.111 0 0.049 0.064 0.068 0 0.020 0.054 0.046 0 0 0 0 0 0.608 0.129 Wealth Below $50K 0.017 0.021 0 0.071 0.054 $100K-250K 0.166 0.097 0.107 0.027 0.051 0.112 0.101 0.252 0.122 0.075
continued on the next page.015 0.039 0 0.541 0.031 0.579 0 0.004 0.485 0.091 0.089 0.238 0.086 0.052 0 0.043
0 0.260 0.172 0.151 0.040 35-49 0.073 $250-1000K 0.127 0.055 0.750 0.082 Above 1000K 0.047 0.059 0.128 0.090 $30-50K 0.162 0.559 0.630 0.295 0.256 0.011 0.389 0.221 0.072 0.157 0.062 Above $100K 0.033 0.025 0.201 0.270 0.137 0.047 0.535 0.069 0.093 $15-30K 0.454 0.087 0.112 0.587 0.149 0.018 0.010 0.111 0.694 0.056 0.019 0.075 Age Under 35 0.080 0.102 0.091 0.047 0.061 0.374 0.028 0.122 0.
.158 0.066 $50-100K 0.078 0.645 0.199 0.143 0.190 0.205 0.445 0.4: Mean Asset Shares.135 0.089 0.083 0.019 0.049 0.077 0.047 0.071 0 0.234 0.135 0.049 0.Table 2.490 0.086 0.002 0.064 0.040 0.147 0.162 0.088 0.183 0.048 50-64 0.078 0.065 0.759 0.281 0.251 0.022 0.062 0.293 0.032 0.489 0.028 0.022 0.287 0.730 0.061 0.415 0.091 0.041 0.050 0 0.007 0.192 0.092 0.132 0.046 0.165 0.181 0.436 RESTATE HO RR 0.359 0.090 0.062 Above 65 0.056 0.068 0.212 0.226 0.055 0.
3) HO represents homeowners and RR represents renters.045 0.070 0.098 0.038 0.560 0.653 0 0 0 0 0.495 0.049 0.609 0.052 0.098 0. Notes: 1) Tabulations are weighted using sample weights. 1998: Continued ACCOUNT STOCK RETIRE HOUSE VEHICLE HO RR HO RR HO RR HO RR HO RR RESTATE HO RR 0.038 0.087 0.222 0. and RESTATE.019 0.115 0.040 0.040 0.122 0.
.044 0.044 0. 2) All dollar values are reported in 1998 dollars.195 0.062 0.087 0.200 0.373 0.089 0.026 0.088 0.117 0.577 0. The text deﬁnes the assets called ACCOUNT.512
Children CHILD0 CHILD1 CHILD2 CHILD3
Source: Survey of Consumer Finances. 1998.032 0.055 0. STOCK. HOUSE.069 0.288 0.061 0.085 0. RETIRE.048 0.102 0. VEHICLE.Table 2.471 0.044 0.110 0.074 0.5: Mean Asset Shares.
and * indicates signiﬁcance at 5 percent level.102 -0.050
CONSTANT AGE AGE2 /100 MARRIED FEMALE CHILD1 CHILD2 CHILD3 CHAGE13 INCOME/10.044 ** 0.261 0. 2) Variables are deﬁned in Appendix A.137 0.Table 2.2.041 * -0.030 ** 0.108 0. The number of observations N=13.000 0.143 0.
.046 0.193 0.042 ** 0.034 ** 0.747 0.063 0.053 0.004 ** 0.072 0.007 0.579.080 0.014 -0.153 ** 0.030 0.085 0.040 -0.096 0.029 -0.000 MTR RISKY WHITE YEAR92 YEAR95 YEAR98
Notes: 1) ** indicates signiﬁcance at 1 percent level.005 ** 0.052 0.047 ** 0.010 2.210 0.304 0.049 ** 0.174 0.040 ** -0.052 ** 0.287 0.118 0.005 ** 0.341 0.137 ** 0.404 0.6: Results from Probit Estimation HOMEOWN Coeﬃcient Standard Errors Marginal Eﬀects -4.
010 0.005 0.029 0.398 0.006 -0.008 -0.010
** * **
continued on the next page.010 0.002 0.018 ** RISKY -0.004 0.005 -0.021 0.011 -0.455 0.006 0.006 -0.049 0.000 0.002 0.003 0.515 0.013 0.003 -0.198 0.020 0.006 ** FEMALE 0.005 0.008 0.001 0.011 0.007 0.002 ** L ASSET 0.006 0.001 * MTR -0.001 0.007 0.190 0.005 0.023 0.009 0.003 ** YEAR92 -0.008 0.004 0.002 0.033 0.005 0.001 -0.008 0.056 0.006 0.054 ** AGE -0.010 0.016 0.001 0.008 0.063 0.006 0.023 0.004 0.024 0.001 0.005 0.032 0.006 0.002 0.018 ** MR:+ wealth -0.061 0.7: Results: Asset Shares and Housing Expenditure of Homeowners
** ** ** **
** ** **
39 ** ** ** ** *
* ** ** **
** ** ** ** ** ** ** ** * ** ** ** *
** ** ** ** ** ** ** ** ** ** ** ** ** * **
ACCOUNT Coef SE CONSTANT 0.008 0.021 0.001 ** AGE2 /100 0.Table 2.062 0.004 0.063 0.026 0.003 0.006 0.007 0.006 0.013 0.004 0.007 ** CHAGE13 -0.089 0.021 0.003 ** YEAR95 -0.002 -0.003 -0.039
VEHICLE Coef SE 0.002 0.004 0.002 -0.023 0.056 0.005 0.004 0.024 0.003 -0.009 -0.003 0.004 0.029 0.003 -0.000 0.006 L INCOME -0.016 0.008 0.003 -0.049
HOUSE Coef SE 1.006 * CHILD2 -0.
.006 ** CHILD3 -0.010 0.077 0.002 -0.037 0.027 0.019 0.005 CHILD1 -0.007 0.006 -0.020 -0.063 0.031 *
STOCK Coef SE -0.010 0.007 -0.006 -0.432 0.003 0.005 0.008 0.001 0.004 ** MR:home -0.009 0.013 0.001 0.021 0.007 -0.003 ** YEAR98 -0.307 0.007 0.004 -0.027 0.022 0.092 0.003 0.021 0.067 0.006 -0.112 0.007 -0.001 -0.012 0.087 0.001 ** MARRIED -0.003 -0.013 0.003 0.001 -0.069 -0.031 0.059 0.115 0.009 0.007 -0.125 0.002 -0.005 -0.026 0.020 0.020 -0.007 -0.024 0.027 0.002 0.009 0.009 0.012 0.001 0.054
RETIRE Coef SE -0.007 0.001 0.
002 0.001 0.8: Homeowners: Continued
** ** ** ** ** ** ** ** **
log Eh Coef SE * -0.158 0.018 0.002 ** MTR -0.001 0.025 0.001 ** MARRIED -0.008 CHAGE13 0.025 0.094 0.002 0.014 0.018 -0. VEHICLE.008 CHILD2 -0.005 -0.009 ** CHILD1 -0.025 0.004 0.004 -0.015 0.002 ** 2 AGE /100 -0. and * indicates signiﬁcance at 5 percent level.018 0.005 YEAR92 0.189 0.066 0.002 0.012 0.032 0.008 0. The number of observations N=10.023 0.015 -0. STOCK.017 0.393 -0.246 0.010 0.204 0.004 -0.007 0.181 0.
.007 * L INCOME -0.220 0.080 ** AGE 0.011 ** 0.015 0.120 ** ** ** ** **
RESTATE Coef SE CONSTANT -0.068 0.017 0.001 -0.008 ** CHILD3 -0. and OTHER.004 0.017 0.000 0.052 0.008 0. RESTATE.005 -0.021 0.006 -0.006 0.503 0.234 0.568 0.009 FEMALE -0.003 0.036 0.177 0.307 0.004 0. 2) The text deﬁnes the assets called ACCOUNT.024 0.584 0. HOUSE.043 0.010 0.Table 2.010 0.004 -0.008 0.119 0.002 -0.024 0.005 YEAR98 -0.005 -0.003 0.007 ** * * 1.116 0.202 0.001 0. RETIRE.036
Notes: 1) ** indicates signiﬁcance at 1 percent level.004 -0.025 MR: + wealth 0.001 0.003 -0.023 0.019 0.003 ** L ASSET 0.005 ** MR:home -0.2.053
OTHER Coef SE -0. All variables are deﬁned in Appendix A.049 -0.025 ** RISKY -0.001 0. MR represents Mills Ratio.005 * YEAR95 0.004 0.004 0.002.004 0.025 -0.002 0.
038 * MR:+ wealth 0.154 ** 0.020 -0.035
VEHICLE Coef SE 2.079 0.027 0.Table 2.003 ** AGE2 /100 0.019 0.013 0.109 0.080 0.001 -0.015 0.021 ** CHAGE13 -0.015 0.010 0.008 -0.014 0.033 0.014 MR:home -0.173 AGE -0.013 * CHILD1 -0.017 0.011 -0.001 0.079 * RISKY 0.010 0.039
STOCK Coef SE -0.015 0.120 0.002 0.001 0.035 0.014 ** L ASSET -0.018 0.037
RETIRE Coef SE ** -0.103 -0.059 0.016 0.024 0.051 0.015 0.021 ** FEMALE 0.019 0.003 0.793 0.014 0.014 0.008 0.000 0.319 0.001 0.015 * YEAR98 0.013 0.003 0.026 0.052 0.381 0.029 0.007 0.050 0.004 -0.015 -0.061 0.004 0.014 0.007 0.130 0.012 0.019 0.018 0.012 0.031 0.019 0.028 0.008 -0.070 0.074 0.015 -0.005 0.017 CHILD2 -0.025 0.029 0.021 0.059 0.002 ** MARRIED -0.002 ** -0.038 0.014 0.000 0.012 YEAR92 -0.030 0.243 -0.002 0.086 0.017 0.064 ** 0.005 0.022 0.039 0.097 -0.001 0.9: Results: Asset Shares and Housing Expenditure of Renters
** ** ** **
* ** ** ** ** ** ** * ** ** **
ACCOUNT Coef SE CONSTANT 0.002 ** 0.089 0.004 0.019 -0.007 0.009 0.027 0.010 0.
continued on the next page.072 0.048 -0.068 0.011 0.054 0.023 0.003 0.001 0.033 0.011 0.019 ** CHILD3 -0.023 0.017 0.077 0.014 YEAR95 -0.034 0.026 -0.004 ** MTR 0.008 0.014 ** 0.204 0.005 0.011 ** 0.006 0.010 0.019 0.006 -0.020 0.243 0.032 0.026 -0.022 L INCOME 0.
014 0.173 0.012 CHILD3 -0.002 -0.580 0.029 0.004 -0.011 -0.021 0.017 0.010 L INCOME 0.044 0.069 0.102 0.577.001 0.020 0. HOUSE.027 0. 2) The text deﬁnes the assets called ACCOUNT.014 -0.10: Renters: Continued
log Eh Coef SE 4.054 MTR -0.008 RISKY 0.004 0. MR represents Mills Ratio.073 ** 0.005 0.Table 2.189 0.042 0.038 0.010 CHILD1 0.018 0.014 -0.064 0.009 YEAR92 -0.030 0.130 * AGE 0.315 0.004 0.030 0.003 -0.004 0.2.014 CHAGE13 -0.011 0.109 0.015 FEMALE -0.037 0.038 0.006 ** **
RESTATE Coef SE CONSTANT -0.010 * YEAR98 -0.033 -0. and OTHER.017 0.
. The number of observations N=3.365 0.012 0. STOCK.005 0. RETIRE.014 -0.001 0.036 0.017 0.285 -0.007 0.022 0.073 * ** ** **
OTHER Coef SE 0.024 MR: home 0.002 2 AGE /100 -0.004 0.083 0.062 0.038 **
Notes: 1) ** indicates signiﬁcance at 1 percent level and * indicates signiﬁcance at 5 percent level.110 0.005 ** -0. RESTATE.020 -0.002 * MARRIED 0.011 CHILD2 -0. All variables are deﬁned in Appendix A.001 0.067 0.033 ** MR: + wealth -0.003 ** L ASSET -0.001 0.001 0.003 -0.009 * YEAR95 -0.014 0.035 -0.365 -0.118 0.012 0.030 0.000 0.005 0.011 0. VEHICLE.061 0.038 0.022 0.035 0.001 0.016 0.020 0.030 0.045 0.010 0.014 0.334 0.032 0.014 -0.002 0.125 -0.020 0.
Notes: The text deﬁnes the assets called ACCOUNT.096 0.094 0.070 0.650 0.086 0.057
0.040 0.056 0.044 0.105 0.058 0.053 0.100 0.089 0.043 CHILD1 0.617 0.611 0.056 0.049
0.079 0.064 0.048 0.642 0.038 0. RETIRE.
.112 0.141 0.030 CHILD2 CHILD3 0.043
0.128 0.122 0. HOUSE.594 0.114 0.064 0.044
0.577 0.111 0.099 0. VEHICLE.038 0. STOCK.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 0.043 0.095 0.055 0.534 0. and RESTATE.607 0.590 0.093 0.036 0.101 0.090 0.061 0.049 0.047 0.103 0.054 0.Table 2.602 0.023 0.102 0.036 0.037
0.049 0.120 0.132 0.047 0.058 0.626 0.552 0.055 0.088 0.
Chapter 3 The Eﬀect of Precautionary Motives on Household Saving and Fertility
3.  and Carroll . however. In many household-level data sets.
. consumption proﬁles over age are hump-shaped. Dynan  and Starr-McCluer  ﬁnd lit1 2
See Zeldes . Kimball .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. Hubbard et al. these models are able to explain some of the empirical consumption puzzles. Yet.2 For example. As an extension to the traditional life-cycle model.1 Introduction
Many recent studies have recognized the role of precautionary motives on household saving behavior. empirical work on the strength of precautionary saving has provided mixed evidence. the standard life-cycle model suggests that households smooth consumption and spread resources across periods of high and low income. Deaton  and Browning and Lusardi  give a list of empirical puzzles. tracking the ageearnings proﬁle. Skinner . Carroll  shows that this kind of consumption proﬁle is consistent with a precautionary saving model in which individuals face uncertainty about their future earnings.
household income or the age of the head might aﬀect household saving and fertility simultaneously. whereas Carroll and Samwick . Most of a household’s saving motives can be grouped into one of three categories: life-cycle motives. and incorporating the restrictions of the theoretical model. fertility might be aﬀected by uncertainty or income ﬂuctuations. Furthermore. the bequest motive includes saving to leave assets to children.  and Lusardi  ﬁnd more support for the precautionary motive. the life-cycle motive includes saving for children’s education.  suggest that the mixed results might be due to the diﬃculties in empirically testing for precautionary saving. For example. By examining the implications of uncertainty on the fertility decisions of households and incorporating fertility decisions into household saving decisions.  for the details.3 One problem that has not been mentioned in the literature is that all of these empirical models try to explain the eﬀect of income uncertainty on household savings. precautionary motives. and. ﬁnding an appropriate instrument. this chapter extends the empirical work on precautionary saving.tle or no evidence for precautionary motive. Browning and Lusardi  and Carroll et al. See Browning and Lusardi  and Carroll et al. the precautionary motive includes saving to protect the well-being of children against income ﬂuctuations. that is. ﬁnally. and bequest motives. It seems reasonable that these motives are aﬀected by the presence of children.
. ignoring the eﬀect of uncertainty on household composition. Yet the causal eﬀect might go in the opposite direction. This chapter takes account of the fact that children are endogenous along with the
The problems include proxying certainty. given precautionary and other motives.
Table 3. retirement. saving for a home purchase peaking below age 31.1 presents the proportion of households citing the following motives -‘rainy’ days. with 18 percent. and saving for the education of children peaking between age 31-40. namely. This chapter also addresses a neglected topic in the childbearing literature. When disaggregated into age groups.7 and 4. The second most frequent reason was saving for retirement.saving behavior when estimating the eﬀect of children on savings. all of the four reasons reveal a hump shape: saving for ‘rainy days’ peaking in the 41-50 age group.  for a survey of life-cycle fertility models. respectively. The most frequently reported reason for saving was to increase resources for ‘rainy days’ such as unemployment and unexpected needs. This suggests that the relative importance of saving for each motive depends highly on the composition and the life-cycle stage of the household. Wolpin  estimates a dynamic stochastic model of fertility within
See Hotz et al.4 For example. The proportion of households citing saving for children’s educational expenses and home purchase were 5. the eﬀect of income uncertainty on fertility over the life-cycle. buying a home and education of childrenas the most important reasons for saving in the 1983 SCF (data come from the panel of 1983-89 SCF and is discussed at length in section 3.3).1 percent. More than 32 percent reported that ‘rainy days’ were an important motivation for saving. saving for retirement peaking between age 51 and 60. Most life-cycle fertility models incorporate some types of uncertainty.
However. None of these studies. and consider a number of uncertainties such as the outcome of the contraceptive eﬀort. I ﬁnd that households with higher income uncertainty are less likely to have a child. 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. even after controlling for the fact that saving is endogenous to the fertility behavior. and does not aﬀect savings of the rest of the population.)
. 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. In a study that addresses whether unemployment risk is an important factor in the timing of the purchase decision of durable goods. This chapter also examines whether having a child has an eﬀect on
Wolpin  presents a model in which income is stochastic but his model also assumes that households have quadratic utility. The ﬁnding is consistent with previous studies that found little or no eﬀect of precautionary motive on savings. there is evidence that income uncertainty has a direct eﬀect on fertility and family size.an environment where infant survival is uncertain. Thus.6 This chapter examines whether income uncertainty is associated with lower fertility and higher savings.5 Hotz and Miller  integrate the life cycle fertility and labor supply. and thus the variance of income does not appear in the decision function. Dunn  ﬁnds consumers respond to increases in the unemployment risk by postponing purchases of a home or a vehicle. and transitory shocks to the wife’s wage. 6 Becker  suggests that children can be viewed as durable goods yielding psychic income to the parents. the time path of the husband’s income. this chapter can be viewed as a combination of those two prior works. 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. 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.
The Relationship between Fertility and Saving
Households are assumed to maximize a lifetime utility function that is
additively separable over time. The utility of household i at age t depends on the number of children, Mit , and a composite consumption good, Cit :
β t U (Mit , Cit )
where β is the discount factor and T is the time of death. The household faces two decisions at each period: whether to have a child, and how much to consume. If parents give birth to a child at age t, then ∆CHILDit = 1, and = 0 otherwise. The number of children at age t, Mit , is the sum of all births until age t. The household is able to borrow and lend across time periods at a real interest rate. Savings at age t, Sit , depend on the household income, the cost of consumption good, and the cost of children. The household income is assumed 48
to be stochastic. Thus the household faces uncertainty about future income. Depending on the utility function, income uncertainty can aﬀect the fertility and consumption decisions of the household. This utility maximization problem, in general, is intractable and does not deliver closed-form solutions without imposing structural assumptions concerning the utility function. This makes deriving testable implications impossible, even for a two-period model. The construction of the model, however, shows how fertility and saving decisions can be determined simultaneously. The lack of testable implications from the theoretical model allows me to examine a general form of saving and fertility behavior. For the empirical speciﬁcation, I assume that the level of savings of a household i at time t, (Sit ), is a linear function of the variability of the household’s income (Φit ), birth of
s a child (∆CHILDit ), and a set of observable variables (Xit ) that measure s the life-cycle stage of the household. The matrix Xit includes the number of
children living in the household, permanent and transitory income and other household demographics. Permanent income is deﬁned as the expected income for year t conditional on the demographics of the household, and transitory income is deﬁned as the diﬀerence between realized and expected income for year t. Savings of a household i at time t can be thus represented as:
s Sit = γ0 + Φit γ1 + ∆CHILDit γ2 + Xit γ3 + u1it
where γ0 , γ1 , γ2 and γ3 are the parameters to be estimated, and u1it is an error term representing unobservable variables. 49
The precautionary saving model predicts that saving is increased by a combination of a positive third derivative of the utility function and uncertainty about the future income. Therefore, a positive value for γ1 is implied by a utility function with a positive third derivative (as with constant absolute risk aversion (CARA) or constant relative risk aversion (CRRA) utility functions). For a quadratic utility function (for which the third derivative is zero), saving behavior does not respond to income variability, and in this case, γ1 should be zero. The life-cycle model suggests that a household that gives birth to a child at time t saves less (due to an increase in necessary consumption). Households with younger heads may save even less with an additional child because their current (expected) income is less than the annuity value of their lifetime income, and the diﬀerence between their income and expenditure is even greater. Such a model suggests γ2 should be negative, and the coeﬃcient of the interaction of ∆CHILDit with the age of the household head should be positive. The childbearing decision of a fecund household is speciﬁed as a function of Φit and a set of household speciﬁc variables that aﬀect the preferences
c for a child, Xit . A household is considered to be fecund if the wife is younger
than age 49 or if the head of the household is a female younger than age 49. The decision to have an additional child is represented as
c ∗ ∆CHILDit = η0 + Φit η1 + Xit η2 + u2it
2) by OLS for all of the sample after substituting γ2 for γ2 for the fecund population ˆ and 0 for the other households. 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.
3. and u2it is an error term representing unobservable variables. The 1983 SCF interviewed a 51
. Then I estimate the equation (3. as suggested by the precautionary saving model. The model is estimated using a two-
stage estimation procedure described in Maddala . Maddala  shows that the resulting estimates of the coeﬃcients are consistent. liabilities. First. where η0 .3
The data set used for estimation is the 1983 and 1989 panel of the SCF.3). and η1 should be negative. income and characteristics in 1983 and 1989. η1 and η2 are parameters to be estimated.where
∗ ∆CHILDit = 1 if ∆CHILDit > 0
= 0 otherwise.
This data set contains detailed information on household assets. Note that the model is identiﬁed even if u1it and u2it are not independent
s c and Xit includes all the variables in Xit . This implies that households with higher income variability are less likely to have a child. If consumers react to increases in uncertainty by cutting down their consumption. then they should also reduce their ‘consumption’ of children.
individual retirement accounts. 103 households and 1. mutual funds. automobile loans.
The 1983 SCF consists of a dual sample. saving accounts. bonds. The ﬁrst saving measure. trusts. vehicles and other real assets like art and precious metals. Total assets is the sum of ﬁnancial assets and nonﬁnancial assets. stocks. certiﬁcates of deposit and saving accounts). money market deposit accounts. See Kennickell and Starr-McCluer  for a general description of the 1983-89 panel. An oversample of 438 high-income households came from this list in 1983. includes capital gains.sample of 4. substantial inconsistencies are observed between reported net investments in assets and measured changes in holdings. This information could be used to exclude both realized and unrealized capital gains. which will be called SAVE1. loans. The 1989 SCF also asked households to report major changes in asset holdings since 1983. call accounts. which makes it diﬃcult to distinguish between active and passive saving. other loans for property. other real estate. 497 of them were reinterviewed in 1989. Net worth (NWORTH) is the total value of household’s assets minus its total liabilities. business equity. cash value of life insurance and the later includes residential property.
. balances outstanding on lines of credit and loans on consumer durables. a list sample was drawn from tax information provided by International Revenue Service. However.7 Household saving is derived as a ﬁrst diﬀerence in net worth between 1983-89. Keogh accounts. where the ﬁrst includes liquid assets (checking assets. and this amount is divided by six to get the annual household saving. home equity. In addition to a standard multi-stage area probability sample. and 361 of them were reinterviewed in 1989. Total liabilities include mortgage debt. credit card debt.
8 Income values for 1982. year dummies. and 1985 are drawn from the 1986 wave of SCF which was conducted with a large subset of 1983 respondents using a shorter questionnaire. before taxes and other deductions were made?’ Income of the households for 1983. The income measure comes from the question. 1986. The precautionary saving model predicts that income risk regarding capital income might have a diﬀerent eﬀect
. To remove the predictable component of income growth. 822 were reinterviewed in 1986 using a shorter questionnaire. 1987 and 1988 are drawn from the 1983-1989 panel. To exclude the capital gains. 9 The income measure includes both capital and non-capital income.The inconsistency seems to be lower for home purchases (Kennickell and StarrMcCluer ). I kept the value of the primary residence constant. I deﬁne two measures of income uncertainty. ‘In [the preceding calendar year] how much was the total income you (and your family living here) received from all sources. dummies representing asset holdings in 1983. All values are converted to 1989 dollars using the Consumer Price Index Research Series Using Current Methods(CPI-U-RS). I regress log income on age.
Income uncertainty at-
Of the 4. education. The ﬁrst measure assumes that households have knowledge about their future income and expect their income to change over time as household characteristics change. 103 households in the 1983 SCF. 1984. household demographic variables and age-interaction terms. 2. 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. Using the panel dimension of income observations in the data.
As pointed out in Lusardi  and Browning and Lusardi .11 This measure assumes households have no information to forecast future income aside from their current income. VRLI may suﬀer from the same deﬁcit if income change is due to a factor that the household has information about but is not controlled for in the income regression. this information is only available for 1983. I control for the employment status of the spouses and female heads in the earnings regression.tributed to each household is equal to the variance of residual log income (VRLI) for the 1982-88 period. However. Most studies use instrumental variables for the uncertainty proxy using information on occupation. Dummies representing the amount of assets that households hold by 1983 are included in the regression to control for this eﬀect. variability measures like VLI and VRLI might be poor proxies for uncertainty. Unfortunately. However. 11 Another income variability measure. The empirical results hold true for this measure too.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. households probably expect their income to change over time and know when some of these changes will happen. which is not reported in this chapter. using instrumental variable estimators is not useful when the ﬁrst stage instruments are poor.
. Therefore. 1986 and 1989. In addition. Not excluding such expected changes biases this VLI measure of uncertainty upward. is the coefﬁcient of variation of log income. The mean of the reported income over the 1982-88 period (MEANINC) is also used as another measure of income. ﬁnding an appropriate instrument
on household saving behavior than that of earnings. 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).
However. A household is only included in the analysis if it remained intact between 1983 and 1989 (i.12 To calculate an accurate measure of income uncertainty.
. The variable ∆CHILD indiThe cut-oﬀ net worth of $10 million and saving of $600. All variables are described in detail in Appendix B. See Kennickell and Starr-McCluer  for details. 035 households with the heads between the age of 22 and 88 in 1983.2 illustrates the composition of the sample in detail.e. those households with more than three missing or non-positive income values are dropped.) This eliminates the income variability or net worth change caused by family separation or family creation.. 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. households that experienced a change in composition such as marriage. separation or the death of either head or spouse are excluded.to exclude for identiﬁcation is problematic.13 Table 3. I use VRL and VRLI without an instrumental variable estimator. 13 The sample design in 1983 speciﬁcally excluded households with the heads under the age of 22. 299 households out of 1. In the panel 1983-89 SCF. Of the remaining 1. The ﬁnal sample consists of 1. 84 were dropped because of outlying net worth or saving values and 66 were dropped because of missing income values. divorce. 000 is somewhat arbitrary. The sample selection criteria for the sample are as follows. this exclusion or a similar one is necessary when working with means which are aﬀected by outliers.180 households.479 experienced a major change in family composition and were dropped from the sample.1. 000. Therefore.
I use a probit model and a dummy variable to indicate the fertility choice instead of using a count data model.3 percent had two children and 1.611 in 1983.are plausible: households with an additional child are younger. The average net worth for households with an additional child is $82.2 provides the variable means by household fertility of the fecund households. 18. ∆CHILD = 1 if the household experienced at least one birth of a child. which is $37. Among fecund households.0 percent had three. According to the SCF data. 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. have higher expected income and have a higher number of young (0-6 years old) children in 1983. respectively.14 I refer to the households that had a child as households with an additional child. but had higher income between 1983 and 1989.6 percent of the fecund households had a child between 1983 and 1989. fecund households are faced with higher income uncertainty than the rest of the sample.179 less than the mean net worth of the rest of the fecund houseOnly 3. i. Also..3 percent of the families experienced more than one birth during that time period-2. mostly married (89. Columns (3) and (4) of Table 3. Columns (1) and (2) provide the variable means and standard deviations of all of the households in the sample and the fecund households. and saved more compared to the other households in the sample. had less net worth in 1983.1 percent). comparisons across the two groups of households . Therefore.
.cates the fertility of the household between 1983 and 1989.e.with and without an additional child . Fecund households are headed by younger persons.
191). On the other hand. The homeownership proportion for the rest of the fecund sample is higher in 1983 but compared to the households with an additional child. Also. Households in the bottom 25 and top 10 percent of the SAVE2 distribution face higher income variability than the rest of sample. This suggests that households at the tails of the income distribution face higher uncertainty. 000. households with an additional child saved more than the rest of the fecund sample. 690. from 67. The homeownership proportion among households with an additional child was 53. 000 and above $60. 648 and $6.5 in 1989. Uncertainty estimates are greater for households with mean income below $10. According to SAVE1 and SAVE2. the bottom 25 percent of the distribution faces a lower income variability than the households in the 25-50 percent of
. respectively.8 percent in 1989. while fecund households without an additional child saved $7. The measures of income uncertainty by household characteristics are given in Table 3.7 percent in 1983 and rose to 77.132 versus 0. 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. When households are grouped by SAVE1.holds.3. 170 and $8. when we compare the income uncertainty of the two groups. they saved $11. 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. we observe that households who had a child are faced with lower income uncertainty (0. 462. the increase is insigniﬁcant.0 percent in 1983 to 72.
The right-hand variables include factors that are expected to aﬀect the demand for a child. the estimates of income uncertainty decrease as the number of children living in household in 1983 increases. Almost 36 percent of the households with heads below age 31 in 1983 had a child during the following six year period. and their permanent income is higher. 0 otherwise. and 1 percent among the age 40 and above group. Considering the income uncertainty. regardless of the uncertainty measure.4
Estimation and Results
Table 3. Households who had a child between 1983-89 are diﬀerent from other households in terms of their saving. Table 3. regardless of how savings were measured. households with young and middle age heads that had a child face lower income variability. for whom it reaches its highest value. For other SAVE1 groups. versus 16 percent of the households with heads between age 31-40. income uncertainty is lower except the top 10 percent of the distribution. 58
. Diﬀerence between the savings of households with and without an additional child increase as the age of the household head increases.the SAVE1 distribution.
3. When grouped according to the number of children. income and income variability.4 represents household saving. The dependent variable is ∆CHILD = 1 if the household had a child between 1983-89. Households that had a child save more.5 shows the results of the probit analysis of the fertility de-
cision of the fecund sample. income and income uncertainty by childbearing decisions and the age of the household head.
number of young (YOUNGCH). number of adults living in the household (NADULT). PERMINC and TRANSINC). indicating that being one year older reduces the probability of having another child by 1 percent. 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. column (2) uses VLI and mean income and ﬁnally. the probability of having another child declines with income variability (regardless of the measure) and the number of children in each age group living in the household.6 percent. an income risk measure (VRLI and VLI). race of the household head (WHITE). a dummy indicating whether spouse works full time at paid employment in 1983 (SPFULLT). 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.1 increase in VRLI and VRL decreases the probability of having a child by 0. a 0.5 and 0. middle (MIDDCH) and older (HIGHSCH) children in 1983 and the interaction terms for age (AGE83×HOWN83 and AGE×YOUNGCH). The coeﬃcient of age is highly signiﬁcant and negative.namely. age (AGE). Evaluated at the sample mean values. a household income measure (MEANINC. A married household is 8 to 10 percent more
. homeownership in 1983 (HOWN83). The results in table 3. respectively. whereas older households with small children are more likely to experience another birth.5 show that other things being equal. marital status (MARRIED). The signs of the age interaction terms imply that older homeowners are less likely to have a child.
6 and 3.6 and 3. both permanent income and mean income in columns (1) and (2) are signiﬁcant. income (PERMINC.5. age of the head (AGE). However.likely to have another child. the number of adults and children living in the household (NADULT and NCHILD). Columns (1)-(3) in tables 3. transitory income in column (1) has a negative eﬀect and mean income in column (3) is insigniﬁcant. a self-described expectation to leave a bequest (BEQUEST83).7 use the same income and uncertainty measures as columns (1)-(3) in table 3. Estimates of the saving equations are presented in tables 3.7 for SAVE1 and SAVE2. 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). the probability of having a child seems to increase with income. Finally. The predicted probability of having a child. in terms of the eﬀect of uncertainty. is included as a right-hand variable with other factors that might aﬀect the saving behavior. Similarly. ∆CHILD. the income uncertainty interaction terms show whether or not . 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. compared to households headed by an unmarried person. namely. a measure of income uncertainty (VRLI and VRL).
. a dummy indicating having 1983 net worth in the top 10 percent and bottom 25 percent (NWORTH90 and NWORTH25). the change in the number of adults between 1983-1989 (∆NADULT). TRANSINC and MEANINC).
around $7. However. and it is signiﬁcantly lower than the estimated propensity to save out of permanent income. households in the top 10 percent of the wealth distribution save almost $11.162. respectively. 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 Table 3. For example. The estimated coeﬃcient of the propensity to save out of transitory income is 0.132-$8.6. the results in Table 3. which is 0. Before we examine the eﬀect of children on savings.447. The results in Table 3. Saving also increases with income. Having 1983 net worth in the top 10 percent is associated with higher levels of SAVE1 and SAVE2 in all speciﬁcations. let us look at the eﬀect of the number of adults living in the household.7 do not the support the idea that households save a higher fraction of transitory income.34.24 in column (1) of Table 3. which is 0.The results for two measures of savings are quite similar (SAVE1 in Table 3. regardless of the measure.162 save about $15. Changes in the number of adults between 1983 61
.7).500 less than the rest of the population whereas households in the bottom 25 percent of the wealth distribution save $3.500 less than the rest of the population as a result of an increase in income uncertainty. evaluated at the sample average of VRLI.6 and SAVE 2 in Table 3.6 show that households in the top 10 percent of the wealth distribution and with VRLI of 0. Both SAVE1 and SAVE2 reduce with the number of adults living in the household.000 more than the rest of the sample.
however. and the fertility decision is modeled as an endoge-
. do not aﬀect SAVE1 but appear to reduce SAVE2.796 more) than household that do not expect to leave a bequest. That is another impact of children on household savings. When we control for permanent income as in column (1) of Tables 3.555-$12. The same is true for the number of children 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. Controlling for the number of children already living in the household. Households with children save less when the household head is below age 35 and save more above that age. Having an additional child reduces savings. we observe that the eﬀects of the children and age interaction terms decrease but do not disappear. the sample is restricted to only fecund households. households expecting to leave a bequest save signiﬁcantly more (around $12. This result highlights the importance of the interaction between household composition and the age of the household head. Also. however being one year older and having an additional child increases savings.6 and 3.and 1989.7. 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. age does not aﬀect the savings behavior of those without children. For this.
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. changes in the number of children and children already living in the household reveal a signiﬁcant eﬀect on household savings.
. Finally.8. depends on the age of the household head. Overall. 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. implying that younger households save less whereas older
See Maddala  for the models with self-selectivity.133 according to the results of the three regressions in Tables 3. however.15 The results are given in Table 3.695-13.297-4.nous switching model. I take into account the fact that fertility decisions are endogenous to household saving decisions.066 less if they had chosen to have a child. This ﬁnding suggests that the overall eﬀect of children on household saving is negative. The results show that households would have saved around $2. In estimating this eﬀect. The direction of the response.
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.6. even after controlling for several demographic characteristics.
Household composition is an important factor of life-cycle savings. the ﬁndings are not consistent with the predictions of the precautionary saving model that agents faced with uncertainty about future income increase their savings. The main ﬁnding of this chapter is consistent with the life-cycle theory of saving and consumption. the age eﬀect on savings disappears.
. At the same time. After controlling for the number of children living in the household and the expectation of leaving a bequest.households save more with an increase in the number of children.
0.117 0.326 0.383 0. Number of observations: 1035.289 0.000
Source: Survey of Consumer Finances.176 0.011 0.122 0.000
0.047 0.323 0. buying home and education of children respectively.250
0.192 0.047 0.041 Children 0.016 0.111 0.065 0. Observations are weighted to reﬂect the U.206
0.010 0.362 0. 1983-1989.
.1: Saving Motives by Age Groups.273 0.004 0. retirement.345 0.S. 1983 All By Age Below 31 31-40 41-50 51-60 61-70 70 and over Rainy Days Retirement Home 0. population as a whole.Table 3.017 0.230 0. Notes: The table reports the proportion of households citing the selected motives as the most important reason for saving as ‘rainy days’.
938 0.1.001 0.456 0.424 0.1 12.372 0.725 0.624 0.788 0.246 0.725 0. All dollar values are in 1989 dollars.8 12.734 0.334 0.297 0.516 2.490 0.135 0.652 0.
Note: ∆CHILD=1 if the household had a child between 1983 and 1989 (0 otherwise).7 0.672 0.778 0.556 0.891 0.845 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 45.162 0. Observations are weighted using the sample weights.112 2.186 2.180 0.645 0.Table 3.189 38.9 0.197 ∆CHILD = 1 11170 8690 38852 41210 82611 30.791 1.437 0.055 0.4 13. The table reports means of the variables.132 0.1 0. All variables are described in Appendix B.6 13.407 0.780 0.747 0.4 0.191 0.670 0.302 0.537 0.460 0.537 0.092 2.120 0.169 Fecund HH ∆CHILD = 0 8282 7648 6868 6462 43109 44122 40171 39921 112861 119790 36.289 0.795 0.767 1.
Table 3.1363 (0.233-12.818 15.446 15.0 0.1436 0.3362 0.169 (0.2642) $30.1996) (0.4881) (0.2171) 2 and more 27.1296 (0.0 0.3334) $52.056 25.3234 (0.4780) $ 10.0 0.078)-1.518-314.2713 (0.6357) (0.1027 0.2920 0.1184 0.2290 0. Observations are weighted using the sample weights (N=1305).2449) (0.2086) Above $314. All variables are deﬁned in Appendix B.5245) 0.5066) 1 Child 17.2740) (0.1855 (0.232 25.2371) $1.2117 (0.000-59.1479 (0.0 0.1 0.5512) SAVE2 Below (-$739) 25.6504) $10.2281 (0.1832 (0.1559 0.1269 (0.0 0.1468 0.5537) $ 1.3333) (0.0 0.0 0.057-30.4963)
0.5836) (0.000-29.0 0.1095 0.2579) $7.492 15.162 (0.000 12.1808) (0.0 0.0902 (0.1.9087) NWORTH Below $10.1715 (0.0 0.2269) (0.3980) Above $24.3: Mean Income Uncertainty by Household Demographics % HH VRLI All 100 0.2458) 0.2657) Above $60.6129) (-$739)-1.1284 (0.2134 0.1462 (0.3279) SAVE1 Below (-$1.9431) (0.1451 0.0 0.1794) Above $30.1803 0.0 0.2210) (0.7 0.1707 (0.0 0.10.2013 0.1716 (0.4232) $10.2391 (0.2 0.0998 0.1194 (0.4092) (0.999 37.446 10.3230) $127.4472) (0.1912 0. VRLI is the variance of residual log income.0988 (0.818 10.489 25.3376) VLI 0.726.1056 0.1527 (0.426) MEANINC Below $10.2738) (0.5530) NCHILD No Children 55.1088 (0.0977 (0.
.7 0.2330 (0.725 25.2374 (0.2825) (0.433) 0.2973)
Note: Standard deviations are given in parentheses.0 0.1 0.3524) (0.125 25.0 0.000 14.490-7.999 36.7517 25.1330 0.265 25. and VLI is the variance of log income.2274) (-$1.0 0.1889 (0.265-52.4940) (0.126-24.1312 (0.2299 0.2 0.078) 25.6786) (0.492 10.
628 0.0841 56. All variables are deﬁned in Appendix B.528 4.619 3.422 0.899 0.Table 3.8 10.3064 0. and VLI is the variance of log income.1774 0.4: Savings.0812 0.1839 0.487 0.5 4.636 27.1 4.1.812 6.1507 20.5 24.1727 3.2261
Note: ∆CHILD=1 if household had a child between 1983-1989 (0 otherwise).272 9.477 40.2376 VLI 0.769 0.220 34. 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.
.912 0. VRLI is the variance of residual log income.2920 6.049 5.390 52.3 8.257 43.331 23.1408 0.1369 0.9 11.884 36.
331 HIGHSCH -0.027** 0.130 0.357 0.0001] [ 0.236 [-0.020** -0.5: Probit: Fertility Decision of Fecund Households (2) Coef StdE 1.225** 0.021** -0.225** [-.024** 0.385** 0.566 [-0.0001] [ 0.203** (1) Coef StdE 1.049 Likelihood -152.134 0.1041] [-0.132** 0.886** 0.001 MEANINC/1000 MARRIED 1.0008] [-.0675] -0.545 0.0577] (3) Coef StdE 1.0845] [-0.073 SPFULLT -0.0613] 0.232 HAGE -0.001** 0.1037] [-0.3340] [-0.627** 0.208** 0.564 HOWN83 2.000 0.31
0.Table 3.1040] [-0.1038] [-0.060 -2.001 1.392** 0.178** 0.717* -0.175** 0.369 [-0.368 -0.024**
Note: Coef reports coeﬃcients and StdE reports standard errors.186**
[-.1297] [ 0.998 -0.00 0.0094] [-.062 -160.0786] [-0.0787] [-0.0625] -0.0844] [-0.768 0.0550] [-0.001* [ 0.627** 0.565 1.077 0.001 1.369 -0.714 NADULTS 0.060 -160.543 0.020** [-.0426] -0.130** 0.20 Pseudo R2 0.006 TRANSINC/1000 -0.980 -0.720* -0.019** 0.0594]
CONSTANT AGE VLRI VLI PERMINC/1000 0.0920] 1.166** 0.060 [-0.068 YOUNGCH -1.131 0.409 0.35 0.154** 0.420 YAGE 0.0553] [-0.063 0. ** indicates signiﬁcance at 5 percent level.397 0.0829] [-0. and HAGE is HOWN83×AGE.047 -0.0095] [-.208** 0. Number of observations N=509.384** 0.886** 0. and * indicates signiﬁcance at 10 percent level.844 MIDDCH -0.31 0.000* 0.366 -0.063 0.
. YAGE is YOUNGCH×AGE.418 0.749** -0. Marginal eﬀects are given in the brackets.175** 0.130** 0.228 WHITE -0.3338] [-0.623** 0.0099] [-.0612] [0.024** 0.953** 0.019** 0.14 0.229 -0.2375] -2.410 0.154** 0.389 0.047 [-0.448 0.0541] -0.
-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 * .035. Number of observations=1.6: Regressions of SAVE1 on Income Uncertainty with Endogenous Fertility Decision (1) Coef StdE 19212 19254 2250 2252 343 3520 26829 12463 ** -21824 6015 ** -71146 29321 ** 2180 2441 -500 3222 36903 11508 ** -464 3230 37290 11447 ** -22195 5914 ** -71517 28439 ** (2) Coef StdE 15228 19373 (3) Coef StdE 15240 19296 2258 2365
70 -208 294 -134139 93086 4256 3304 343 102 ** 240 59 ** -7554 3838 ** -22542 11934 * 646 320 ** 12654 5751 ** -7664 5177 .22 257 53 -7244 3908 -24818 11791 707 319 12952 5786 -7845 5112 .Table 3. ** indicates signiﬁcance at 5 percent level.22
** ** ** ** **
Note: Coef reports coeﬃcients and StdE reports standard errors.
. and * indicates signiﬁcance at 10 percent level.
18 223 57 -8264 3929 -24089 11699 686 319 11736 5772 -10074 5321 . Number of observations=1.7: Regressions of SAVE2 on Income Uncertainty with Endogenous Fertility Decision (1) Coef StdE 23200 19365 1501 2042 712 3511 24093 12070 ** -20171 6222 ** -61036 29489 ** 1583 142 32041 2137 3237 11432 ** 182 3244 32484 11382 ** -20204 6023 ** -60981 28519 ** (2) Coef StdE 17753 19528 (3) Coef StdE 17718 19448 1550 2091
71 -257 293 -126939 91894 3945 3267 292 100 ** 210 63 ** -8479 3843 ** -21818 11811 * 624 320 * 11545 5760 ** -9888 5374 .18
Note: Coef reports coeﬃcients and StdE reports standard errors.Table 3. and * indicates signiﬁcance at 10 percent level. ** indicates signiﬁcance at 5 percent level.
-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 * .035.
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.695 12.154 10.
.133 12.672 8.Table 3.8: The Eﬀect of a Change in the Fertility Decision on SAVE1 Fecund HH E(SAVE1|∆CHILD=0) E(SAVE1|∆CHILD=1) N (1) (2) (3) 13.527 10.
First. and the average amount of their support was about $3. Understanding the eﬀect of ﬁnancing children’s college education on household saving behavior is important at least for three reasons.000).900 (Choy and Henke ). for those in the higher income group (income above $70. 65 percent of the parents contributed a positive amount to their children’s college costs as a gift. According to the 1996 National Postsecondary Student Aid Survey (NPSAS). While the percentage was lower for those in the lower income group (income below $35. and 80 percent reported using some current income. Gale and Scholz  estimate that the annual ﬂow of parental
. 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. Using the 1983-86 SCF. Of those contributing to their children’s college costs. 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 ). about 65 percent reported using some previous savings.Chapter 4 Saving for Children’s College Education
Long  ﬁnds that the eﬀect of the ﬁnancial aid tax on asset holdings is smaller than the eﬀect in the prior literature. Using alternate but also plausible assumptions.441. The college ﬁnancial aid system imposes an implicit tax on the savings of households that are potentially eligible for ﬁnancial assistance. Dick and Edlin  use data on ﬁnancial aid awards to calculate a marginal tax rate and ﬁnd that families with children attending average-priced colleges face a ﬁnancial aid tax ranging from 2 percent to 16 percent. as shown in Long . Using the data on actual expenditures on children’s college education. which is 12 percent of the aggregate net worth in 1983. According to Edlin  and Feldstein .5 billion. Edlin . However. Gale and Scholz  convert the ﬂow of college support to a stock of wealth using steady-state assumptions.
. Second. Feldstein . To date. According to their estimation.contributions totaled about $35 billion. families who save for college reduce their eligibility for ﬁnancial aid. the focus has been on calculating the ﬁnancial aid tax and measuring its negative impact on household asset accumulation. this chapter examines the eﬀect of anticipated educational expenses on household savings. the ﬁnancial aid tax rate on capital income can be as high as 50 percent. Dick and Edlin  and Long  have recently examined the adverse eﬀect of the means-tested student aid process on household asset accumulation. anticipated college costs and the amount of aid that is received and so on. contributions to children’s education yield a wealth of $1. the results in Edlin  and Feldstein  depend on a variety of assumptions such as the number of children enrolled in college.
the quality-quantity model of fertility behavior assumes that parents have preferences both for the expenditure per child and the number of children. The estimates in Tomes  show that family size and children’s schooling are jointly determined. they analyze the inﬂuence of size and ordinal position of siblings on the like-
. The estimates in Tomes  conﬁrm the prediction of the quantity-quality model that bequests and children’s income are negatively related to family size. Using the National Longitudinal Survey of the High School Class of 1972. diﬀerent forms of parental expenditure such as children’s schooling. child care and bequests have been used as the qualitative measure. and test predictions of their model using the veterans sample of white male twins and the sample of their adult oﬀspring. Without unequal access to schooling. with and without equal access to ﬁnancing for education. they ﬁnd an inverse relationship between family size and children’s schooling. Steelman and Powell  investigate the relationship between the structure of the sibling group and parental ﬁnancial support for children’s college education. are negatively related to subsequent levels of inheritance.Third. which are measured by children’s income and years of schooling. The analyses in Willis  and Becker and Lewis  show that parents with few children have substituted quality for quantity. Tomes  empirically tests whether parental bequests of wealth and human capital investments represent substitute forms of parental transfer. Behrman et al. In the empirical investigation of this model.  develop a model relating children’s schooling to family size. The results of his model conﬁrm that investments in children’s human capital. Speciﬁcally.
lihood and amount of parental support. This chapter also uses the amount of parental expenditure on children’s college education as a measure of child quality. emergencies. Their results show that the number of siblings signiﬁcantly decreases both the likelihood and amount of parental contribution to children’s college education. saving for ‘rainy days’ and saving for bequests and inter vivos transfers. education and so on.
The data set used in the chapter does not provide information on the ordinal position of the child attending college.7 and 28. A number of studies have analyzed motives for saving such as saving for retirement. using Japanese household data. bequests.
.2 percent of gross saving. ordinal position alters parental support in favor of later-born children.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.1 Given the rapidly rising cost of college tuition. 2 See Browning and Lusardi  for a survey of the literature. Parents have more resources when later-born children reach college age. The results of their analysis show that retirement and precautionary motives account for 25.2 In addition. Moreover. Horioka and Watanabe  analyze the amount of gross saving and dissaving for each of twelve motives including saving for retirement. Saving for children’s education is the third most important saving motive after saving for retirement and ‘rainy days’ and accounts for 9. an analysis of ﬁnancing college education and family size highlights an important aspect of the quality-quantity model. Steelman and Powell  argue that later-born children are more favored relative to earlier-born ones due to the family life cycle. Their ﬁndings also show that the importance of each saving motive depends on the age and the life-cycle stage of the household. respectively.
3 percent list retirement and 5. taking vacations and so on. Other reasons for saving include saving for ordinary living expenses. ‘rainy days.3). 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 4.1 shows the percentage of households in the 1983 survey citing retirement. medical and dental expenses.Although saving for retirement. the motive of saving for children’s education has not been much investigated. buying a home and other reasons as the most important reason for saving.5 percent of households list ‘rainy days’ as the most important reason for saving. 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. and buying durable household goods.1 shows the percentage of households reporting that they cannot or do not save. Souleles  examines consumption of households as they pay for the college expenses of their children.’ home purchase and children’s education. His ﬁndings are consistent with the life-cycle theory of consumption and saving. Among the households saving for retirement.’ is the most cited reason.3 percent list education as the most important reason for saving. saving for ‘rainy days. The SCF contains a question that asks the household’s most important reason for saving. ‘rainy days’ (emergencies and unemployment). Using the Consumer Expenditure Survey. While 35. Table 4. education of children. 15. One exception is Souleles .
. income ﬂuctuations and bequests have motivated substantial research. The table provides the responses of the sample used in this chapter.
among households with 1 or 2 children. and the percentage of households citing retirement as the most important reason increases.4 percent in the top 25 percentile report saving for retirement.1 also shows the percentage of households citing each saving motive by the number of children and net worth in 1983.8 percent). As the number of children increases. while only 2. 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. the eﬀect of the number of children on the percentage of households reporting saving for children’s education disappears.’ retirement and other reasons show a systematic trend relative to the total number of children. Table 4. 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. 24. Among the households in the bottom 25 percentile of the wealth distribution.3 percent vs. Among the households in the higher wealth groups.7 percent of those in bottom 25 percentile of wealth distribution report saving for retirement. For example. the percentage of households saving for retirement increases with wealth. 5.The percentage of households saving for ‘rainy days. the percentage of households citing ‘rainy days’ and other reasons as the most important reason decreases. 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. Controlling for the number of children. This table shows that the number of
Other things constant. In this chapter. the eﬀect of anticipated educational expenses on household savings are estimated. The remainder of this chapter is organized as follows. The results show that an increase in the number of children decreases the per child college expenditures paid by households by approximately by $317 in 1986 dollars. Households with higher income and wealth expect to have higher educational expenses. Section 4. Further. and the amount of savings increases with the age of the household head. the empirical ﬁndings provide an answer to why saving is concentrated among wealthier households. a household with a 43 year old head expecting to have $2.children has a signiﬁcant eﬀect on saving motives. 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.000 in children’s college expenses saves $8. Using the actual college expenses reported in the SCF. I also obtain predictions concerning the simultaneous determination of family size and college expenditures per child.2 an79
. We continue to observe this eﬀect even after controlling for the household wealth. households save for their children’s college expenditures. 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.000 more than it would had it not expected to have any college expenses. Also. The data from the 1983-86 SCF is used to estimate two equations in which the dependent variables are household savings and educational expenses. and they save in advance for these expenses.
a couple earns y1 .1)
. second-period consumption. 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 summary and conclusions are presented in Section 4.2
A Model of Saving for College
This section considers a world in which individuals (parents) live for
two periods. chooses to have n children.4 provides a framework for the empirical analysis of the interaction between savings and college expenditures. For simplicity. Section 4. investment to each child’s education.2) (4. Parents choose ﬁrst-period consumption. and the family consumes together c1 and saves A to earn interest at the rate of r. per capita college investment is assumed to be equal for all n children.
4. and the number of children to maximize U = U (c1 . Section 4. In the ﬁrst period.3 describes the 1983-86 SCF.5 estimates the determinants of college expenditures and uses these estimates to investigate the eﬀect of expected college expenditures on household savings. n) subject to c1 = y1 − A c2 = y2 + (1 + r)A − πen 80 (4. Finally. In the second period. e. Section 4.6.alyzes a model of the quality-quantity interaction of fertility with household savings.3) (4. c2 .
5) can be written as follows:
1 y1 − A = (1 + r) γ−1 . a decrease in second-period consumption is likely to decrease the ﬁrst-period consumption.7)
where U1 and U2 are the marginal utility of consumption in the ﬁrst and second periods. Substituting (4.
. respectively. e.3) into (4. y2 + (1 + r)A − πen
(4. and Un is the marginal utility of family size.8)
where γ is the elasticity of substitution.6) (4. which results in an increase in accumulated assets. This expression implies that an increase in educational expenses decreases the second-period consumption relative to ﬁrst-period consumption.2) and (4. educational expenses (e) and the number of children (n). equation (4. The ﬁrst-order conditions are −U1 + (1 + r)U2 = 0 −πnU2 + Ue = 0 −πeU2 + Un = 0 (4. If the utility function is CES with equal elasticity of substitution between all arguments.5) (4.1) yields the following unconstrained maximization problem: U = U (y1 − A. n) (4. Ue is the marginal utility of children’s education. y2 + (1 + r)A − πen.where π is the price of education. Since the right-hand side is a constant.4)
where the three choice variables are accumulated assets (A).
If the third derivative is positive. The empirical speciﬁcation of the model described below controls for precautionary saving while it estimates the eﬀect of educational expenses on household savings. E1 [U2 ] exceeds U2 [E1 ]. 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. 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.To extend the analysis to account for uncertainty. 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 (4.6) and (4. 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.3 The combination of a positive third derivative of the utility function and uncertainty about future income reduces consumption in the ﬁrst period.
. When uncertainty about future income is assumed.7). In this case. then U2 is a convex function. This interdependence implies an inverse relationship between the number of children and educational expenses.
The ﬁrst measure. 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.
. 2. In 1986. Household savings are measured in two ways.4 The college expenditure variable (COLLEXP) captures the quality dimension associated with the expenditure per child. college expenditure. The variables used in the empirical analysis are classiﬁed into four groups: fertility. income and demographic characteristics. The SCF contains detailed information on household assets. The fertility variable (CHILD) is the number of children of either the respondent or spouse. including those not living in the household. In 1986. This variable includes children of previous marriages living with former spouses. liabilities. The respondents were also asked how many years of college their children completed from 1983-85.822 of these households were reinterviewed. The college expenditure variable is the outlay of college education per child.4. SAVE1.3
The empirical analysis uses data from the 1983-1986 SCF. I use the number of children attending college and the number of years they attended to normalize college expenditures.824 households and a high-income supplement of 438 households.
Unfortunately. The 1983
survey contains interviews from a random sample of 3. savings and other control variables. the data does not diﬀerentiate between children away in college or living on their own and with former spouses.
and whether or not the household head is willing to undertake risky investments). These are age. Using the reported household income for 1982. the value of the primary residence in 1983 is kept constant. education. credit card debt. and the demographic characteristics associated with tastes (urban residence. educational expenditures and fertility decisions.
. loans. a second measure of savings (SAVE2) is used. race. and the educational level of the spouse. certiﬁcates of deposit and saving accounts). marital status. In order to exclude unrealized capital gains on the primary residence. gender and the educational level of the household head. business equity.is the change in net worth between 1983 and 1986 divided by the number of years. reasons for borrowing and saving. vehicles and other real assets like art and precious metals. race. home equity. Other controls include variables that aﬀect savings. money market deposit accounts. 1984 and 1985. saving accounts. Keogh accounts. Whenever a household did not buy or sell a house that was the family’s primary residence. 1983. other real estate. Transitory income (TRINC)
Total assets is the sum of ﬁnancial assets and nonﬁnancial assets. I estimate household permanent and transitory income. Total liabilities include mortgage debt. mutual funds. other loans for property. Household permanent income (PERINC) is deﬁned as the predicted income in 1985 obtained from regressing the log of total income on age. cash value of life insurance and the later includes residential property. balances outstanding on lines of credit and loans on consumer durables. automobile loans. individual retirement accounts. where the ﬁrst includes liquid assets (checking assets. trusts. call accounts. gender of the household head and other household characteristics. stocks. Net worth (NWORTH) is the total value of household’s assets minus its total liabilities. bonds.5 SAVE1 includes the realized and unrealized capital gains.
Permanent and transitory incomes in 1985 are $25. For households with nonzero college expenditures.806 and according to second measure.3 presents average household savings and college expenses by 85
. the average expenditure is $2. Table 4. it saves $4.000 are excluded to avoid the diﬃculty of modeling the relationship between educational expenditures and savings. households with family income above $100. The average household in the sample is headed by a forty two year old married high school graduate and includes two children. the typical household saves $5.690 households. The sample is restricted to families that did not change composition from 1983-86. respectively. According to the ﬁrst measure of savings.005.2 presents summary statistics of the variables used. Appendix C. The head of the median household reports that it is all right to borrow money for educational expenses.811. Households with retired household heads are assumed to be in the life-cycle stage of dissaving.931 and $3.296. Estimating the relationship between savings and educational expenditures is complicated for families who experienced a major change in composition such as marriage and divorce.575 in 1986 dollars. These restrictions leave us with a sample containing 1. The average household net worth in 1983 is $81. Also.is the diﬀerence between reported income in 1985 and estimated permanent income.1 gives a detailed deﬁnition of the variables used in the estimation of the model. Table 4. The sample is also constrained to include only the households with nonretired household heads and their spouses if the head is married.
the number of children attending college. Table 4.
4. However. Savings of households with children in college increase with net worth. 25-75 percentile and top 25 percentile) spend less per child as the number of children attending college increases. household savings increase with the number of children in college. As the number of children in college increases. The data show that households continue to save while children are in college. 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.077. more than twice as much the households in the same wealth group with one child in college.10)
. The data show that college expenses increase with net worth. Households in the top 25 percentile of the wealth distribution with two or more children in college save on average $18.9) (4. college expenditures per child decreases. Households in all three wealth groups (bottom 25 percentile.3 also breaks down savings and college expenses by the number of children in college and net worth in 1983. However.4
The simultaneous relation between educational expenses (e∗ ) and house-
hold savings (a) is speciﬁed as follows: e∗ = δ1 ni + x1i κ1 + u1i i ai = η2 e∗ + x2i κ2 + u2i i 86 (4. the number of children in college is inversely related to the expenditure per child as predicted by the quantityquality model.
e. The structural disturbances ui = (u1i . is obtained to estimate the expected educational expenses. the completed fertility.where x1i and x2i are the vectors of exogenous variables. The empirical results hold true for this measure of fertility too. u2i ) are assumed to be randomly drawn from a 2-variable distribution with E(ui ) = 0 and E(ui ui ) = . The model predicts that an increase in the number of children decreases the anticipated and actual educational expenditure.6 Information on educational expenses is available only if the household has a child attending college and if the household spends a positive amount
The model is also estimated using the predicted number of children obtained from the Poisson model. and κ1 and κ2 are the vectors of parameters to be estimated. δ1 < 0.11)
where x3i is a vector of demographic characteristics. i. κ3 is a vector of parameters. η2 > 0. I use estimates of the parameters of a Poisson regression model to construct the completed fertility proﬁle when the household head is 55 years old. and φi is an age speciﬁc factor. n.
. The expected completed family size is given by E[n] = exp(x3i κ3 + φi ) (4. Therefore. Another prediction of the model is that educational expenses increases household savings.
The theoretical model derives predictions concerning the eﬀect of the completed lifetime fertility on the educational expenses. However. the data on household fertility gives the number of children ever born to a household headed by a person of a certain age.e. i.
age (AGE). I obtain expected i i educational expenses as follows. First. gender (FEMALE). race (BLACK) and the education of the household head (HIGHSCH and COLLEG).on ﬁnancing her education.
4. Controlling for permanent income. 88
Estimation and Results
Table 4. Let gi = 1 indicate that the household has a child attending college. Then e∗ is observed to be ei if e∗ > 0 and gi = 1. The right-hand variables include household demographics expected to aﬀect the number of children: namely.4 are consistent with previous studies. Estimates of the coeﬃcients in Table 4. Then I use the estimates of those parameters to construct the proﬁle of anticipated educational expenses. permanent income (PERINC).4 contains estimates of the Poisson regression model of the
fertility equation. households headed by high school and college graduates have fewer children than those headed by persons without a high school degree. I estimate a Tobit model for the educational expenditures of the households with children attending college. a dummy indicating whether the spouse works for a full time job in 1983 (FSPOUSE). and education of the spouse (HIGHSCHSP and COLLEGSP). An increase in the permanent income increases the number of children. gi = 0 indicate that none of the children are attending college. and a dummy indicating whether the household does not live in a SMSA area (NSMSA). However. Married households have more children. martial status (MARRIED).
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). The right-hand variables also include other factors that might aﬀect the college expenditures. namely. 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.5 reports estimates of the equation (4. households with spouses working full-time and with high school and college degrees have fewer children. age (AGE) and education (COLLEG) of the household head. I use the estimates of the regression to predict the completed household fertility when the household head is 55 years old (CHILD). The average CHILD is 3. a dummy indicating whether or not the household head believes it is all right to borrow money for college expenses of children (BEDUCAT) and dummies indicating the most important reason for saving (SRETIRE.03. 338 had a child attending college between 1983-86. The instrumental estimate of the coeﬃcient on the number of children is almost three times as large as the OLS estimate (-$459 vs. Table 4. Of the 1. -$187). and 252 reported contributing a positive amount to their children’s college expenses. As predicted by the quantity-quality model. the amount of college expenditure decreases with the number of children.controlling for marital status. SEMERG.690 households in the sample. SCHEDUC and SHOME). Columns 1 and 2 contain the results with CHILD and columns 3 and 4 contain the results with CHILD.
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. the average contribution of the top 25 percentile is $3. While the average contribution of households in the bottom 25 percentile of wealth distribution is $1. to calculate the expected college expenditures (COLLEXP ). Estimated contributions of the households with children in college are very close to the actual expenses.6 show SAVE1 and SAVE2 for households with 90
. and δ1 and κ1 are the estimates of δ1 and κ1 . Estimates in Table 4. The last two columns of Table 4. Households citing saving for retirement and buying a home as the most important reason for saving spend less on children’s education. ˆ σ (4.093 per child. The amount of contribution to children’s college education increases with wealth.789 per child. Table 4.436.variables as follows: ˆ ˆ δ1 ∗ Φ((δ1 ni + x1i κ1 )/ˆ ).5 show that increases in permanent and transitory income increase the level of expenditures for educational expenses.6 presents actual and estimated college expenses by household net worth in 1983. CHILD. 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. I use estimates of the Tobit model and the expected completed fertility. The average COLLEXP is $1. respectively.12)
where σ is the estimate of the standard error. ˆ Using the approximation.
Similar to Table 4. a dummy indicating whether or not the household had a windfall greater than $3. the coeﬃcient of expected college expenditure (COLLEXP ) is negative and the coeﬃcient of age interaction term (AGE×COLLEXP ) is positive. gender (FEMALE) of the household head. The estimates of SAVE1 and SAVE2 are very similar.000 between 1893-86. which are retirement and emergencies (SRETIRE and SEMERG).and without children in college. Interestingly. households with greater wealth save more if they have a child attending college.3. two other reasons for saving. Table 4. Columns 1 and 2 contain the estimates for SAVE1. However. Explanatory variables include age (AGE). Households in the bottom 25 percentile of wealth distribution save signiﬁcantly less than those without children in college. and the number of children attending college between 1983-86 (NCHCOLL).6 show that wealthier families contribute more to their children’s education and continue to save while their children are in college. In estimates of both equations. indicating that an increase in expected college expenditure raises 91
. and columns 3 and 4 contain the estimates for SAVE2.7 presents the eﬀect of expected college expenditures on household savings. nonurban residence (NSMSA) and dummies indicating household net worth in 1983 (NWORTH25 and NWORTH75). the data in Table 4. households in top 25 percentile of the wealth distribution save almost ﬁve times more if they have a child in college. a dummy indicating whether the household head is willing to take risky investments (RISKY). permanent and transitory incomes (PERINC and TRINC).
By typical. For each age group. saving for emergencies does not signiﬁcantly aﬀect savings. Unfortunately.7. the number of children attending college does not signiﬁcantly decrease household savings. I mean a household in the 25-75 percentile of the wealth distribution.1 shows the eﬀect of the age of the household head on SAVE1. However.833 more than other households.000 to college expenses and compares it to what it would have saved. showing that households save approximately 39 percent of their transitory income.savings after age 28. Finally. households with heads who are willing to undertake risky investments save $7. household savings are calculated in ﬁve year intervals. the data does not have detailed information on the years that children were attending college between 1983 and 1986. citing a motive other than retirement or emergencies as the most
.398 less than those in the middle of the wealth distribution . households in the bottom 25 percentile of the wealth distribution save $2. This result does not necessarily mean that households are not saving for children’s college education. The eﬀect of transitory income on both measures of savings is positive and signiﬁcant. Households citing saving for retirement as the most important reason save more. Also. the ﬁgure ﬁrst calculates savings of a typical household expecting to contribute $2. Using the estimates in Table 4. 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. Figure 4. Permanent income increases both SAVE1 and SAVE2. had it not expected to contribute a positive amount.493 more and households in the top 25 percentile save $11. Finally.
4.000 between 1983-86.000 college expenses increase with age. I also obtain predictions
. The household is assumed to have average permanent and transitory incomes for their age group.6
This chapter examines the eﬀect of saving for children’s college edu-
cation on household savings. this will increase its saving by $4. This striking result is due to the assumption that this household is assumed not to cite saving for retirement as the most important reason.7 show that the eﬀect of saving for retirement on household saving is positive and raises household savings by $4. The results in Table 4.894. The eﬀect of expecting to contribute $2000 on household savings is $8.000 at the age of 43. headed by a male. the eﬀect of anticipated college expenses on savings is positive and signiﬁcant. 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.important saving motive. and it increases with the age of the household head.894. If we assume. This ﬁgure only shows that controlling for other factors. Saving motives change with age and household composition. savings decline to zero at the age of 43. for example. who is not willing to undertake risky investments and did not receive a windfall greater than $3. that this household starts saving for retirement when the household head is 43 years old. If the household does not expect to contribute to children’s college expenses. The results show that savings of the household with an anticipated $2.
The amount of savings for college expenses increases with the age of the household head. and the change in net worth excluding the capital gains on primary residence.000 at the age of 43. The results are consistent with the predictions of the life-cycle theory of saving and consumption that households save in advance for expected expenses. which show that despite large college expenses. The results are also consistent with the ﬁndings in Souleles .concerning the simultaneous determination of family size and college expenditure per child. which are the change in net worth between 1983 and 1986. Using the actual college expenditures reported in the 1983-86 Survey of Consumer Finances. the diﬀerence between savings of households with and without college expenses can be as high as $8.
. I analyze the eﬀect of educational expenditures on two diﬀerent measures of savings. Other things constant. 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. By focusing on household savings. The main ﬁnding of this chapter is that households save in advance for children’s college expenditures. 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. households smooth consumption into the academic year and do not cut consumption in the 6-9 months before the academic year starts.
NWORTH 0-25p 0 1-2 3 or more 0 1-2 3 or more 0 1-2 3 or more 0.543 0.042 0.058 0.023
0.244 0.049 0.264 0.153 CHILD 0 1-2 3 or more 0.021 0.000 0.042 0.341 0.000 0. SEMERGE: saving for ‘rainy days.082 0. SRETIRE: saving for retirement.223 0. SHOME: saving to buy a home.016 0. The number of observations N=1690. Notes: This table reports the proportion of households citing the selected motives as the most important reason for saving.345 SEMERG SCHEDU 0.381 0.401 0.455 0.057 0.383 0.063 0.380 NOSAVE 0.029 0.397 0.469 0.339 0.120 0.074 0. 1983.330 0.070 0.212 0.023 0.007 0.279
0.355 0.033 0.278 0.115 0.341 0.102 0.053 0.079 0.000 0.009 0.027 0. SOTHER: saving for other reasons and NOSAVE: cannot/does not save.369 0.440 0.053 SHOME 0.310 0.035 SOTHER 0.043 0. Tabulations are weighted using the sample weights.068 0.013 0.391 0.066 0.016
0.’ SCHEDU: saving for the education of children.049 0.337 0.377 0.471 0.1: Saving Motives By the Number of Children SRETIRE 0.027 0.057 0.010 0.060 0.032
75 to 100p
Source: Survey of Consumer Finances.351 0.382 0.064 0.004 0.083 0.009 0.002 0.043 0.
.Table 4.404 0.087 0.
43 HIGHSCH 0.11 12491.35 WINDF 0.86 PERINC 25931.08 161860.64 NWORTH 81575.50 BLACK 0.17 0.28 0.14 COLLEXP> 0 2005.68 AGE 42.53 0.24 0.41 33402.Table 4.75 TRINC 3296.45
Source: Survey of Consumer Finances.10 FEMALE 0.13 0.47 SAVE2 4811. Notes: Tabulations are weighted using sample weights.
. All variables are described in Appendix C.37 NSMSA 0.13 35397.48 BEDUCAT 0.86 0.32 2817. 1983-86.24 0.43 COLLEG 0.2: Descriptive Summary of Variables Variables Mean Std. The number of observations N=1690.36 SAVE1 5806.43 14. All dollar values are reported in 1986 dollars.1.28 RISKY 0.65 0.32 15127.33 MARRIED 0.47 2. Deviation CHILD 2.08 0.
1983-86.Table 4. The number of observations N=1690. All dollar values are reported in 1986 dollars.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
Source: Survey of Consumer Finances.
. Notes: NCHCOLL shows the number of children attending college between 1983-86. Tabulations are weighted using sample weights.
062 ** 1.022 0.Table 4.078 0.134 ** 0.930 0.461 0.097 ** 0.126 ** -0. 1983-86. Notes: ** indicates signiﬁcance at 5 percent level.057 ** -0.964 0.038 0.4: Poisson Regression: Number of Children CONSTANT AGE FEMALE FSPOUSE HIGHSCH COLLEG BLACK MARRIED NONSMSA PERINC/1000 HIGHSCHSP COLLEGSP N OBS Mean of dependent variable Log L R2 Coeﬃcient Std. Variables are described in Appendix C.
.062 ** 1690 2.435 0.032 0.717 0.004 ** -0.408 0.090 ** -0.145 ** 0.389 0.039 ** -0.48 0.038 0. Error -1.43 -2971.128 ** 0.293
Source: Survey of Consumer Finances.1.106 0. and * indicates signiﬁcance at 10 percent level.
0 9. Error -601.5 22.9 2912.1.1 550.4 1589. Notes: ** indicates signiﬁcance at 5 percent level.4 10.4 23.9 ** 67.6 408.2 2524.1 -4936. Error Coeﬃcient Std. All variables are described in Appendix C.5 551.4 92.9 ** -187.4 555.5: Tobit Estimates of College Expenditure Equation Coeﬃcient Std.0 0.0 ** 2905.7 338 .7 * 997.8 468.1 1063.Table 4.9 -45.9 -458.5 472.3 609.8 232.6 1452.0 409.8 -7.9 ** -4903.81
CONSTANT AGE CHILD CHILD PERINC/1000 BEDUCAT SRETIRE SEMERG SCHEDUC SHOME COLLEG TRINC/1000 SIGMA N OBS Proportion of + observations Log L
** ** * ** ** * ** **
-2429.8 -372.3 2444.8 473.
.0 ** 72.2 19.1 72.3 134.7 ** 1391.70
Source: Survey of Consumer Finances.6 133.7 1467.5 -1335. 1983-86.2 88.5 18.746 -2429.6 -1124. and * indicates signiﬁcance at 10 percent level.6 -407.1 611.8 ** -1103.9 557.
1983-86.59 2334 17.52 0 5. CHCOLL=1 if the household has a child attending college between 1983-86 (0 otherwise).29 1436 44.6: College Expenditures and Savings by the Number of Children in College NWORTH CHCOLL 0-25p 0 1 25-75p 0 1 75-100p 0 1 %HH COLLEXP 23.65 0 1.Table 4. The number of observations N=1690.93 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. Notes: Tabulations are weighted using sample weights.
.02 0 7. All dollar values are reported in 1986 dollars.
3 416.2 3422.3 * 3028.1 4.9 139.6 10944.2 3.Table 4.8 163.4 2434. Notes: ** indicates signiﬁcance at 5 percent level.1 4894.3 2016.6 -315.0 7833.3 2954.6 1516.3 10.2 3.084
Source: Survey of Consumer Finances.4 2538. All variables are described in Appendix C.8 160.7 ** 0.2 1820.0 -11398.5 2409.8 4.2 ** -9.0 5607.8 2783.8 -615.1.3 0.8 3199.8 ** 6820.8 .5 -1310.0 382. 1983-86.9 1728.4 ** 336.0 1642.1 2796.3 ** 10.3 0.9 2474.8 382.8 140.6 ** -9329. and * indicates signiﬁcance at 10 percent level.3 -774.7: Eﬀect of Anticipated College Expenses on Savings
** ** ** ** ** ** ** * ** ** **
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. Error ** 22327.1 3139. a Predicted value of the variable from Tobit regression of educational expenditures.5 .5 1325.0 1271.8 761.2 -10.0 2460.1 * 4679.3 ** 309.6 407.107
SAVE2 Coeﬃcient Std.0 -790.2 5041.5 0.6 2026.9 11080.
.2 ** -1284.8 3349.5 2493.6 388. Error 22618.
• 3.1: The Importance of Educational Expenses on Savings
SAVE16 10. 068 − | 28 | 33 | 38 | 43 • | 48 | 53 Age
. 736 − • • • | 23 −1.Figure 4. • savings of a household with no college expenses. 791 −
savings of a household with $2000 college expenses.
alimony received. In determining ﬁling status and personal exemptions. I use the information on marital status. The SCF collects information on many components of total income. rents. tax-exempt interest. Thus. All married couples are assumed to ﬁle a joint return. job expenses and moving expenses. and age of the household head and the spouse. royalties. number of dependents. business income and farm income.1 Estimating Marginal Tax Rates
The marginal tax rate of each household is computed using the tax Form 1040 and the information on sources of income. The SCF does not contain information on some possible deductions such as medical expenses. taxable interest. including wage and salaries. households are assumed to claim standard deductions instead of itemizing deductions. Components of income such as other gains and IRA distributions that are not reported in the SCF are set to zero. state and local income taxes. dividends. The sum of household income from all sources gives the adjusted gross income (AGI).Appendix A Appendix for Chapter 2
A. Subtracting the standard deduction and exemptions from the AGI
Marginal tax rate of the household.once with AGI and then with AGI minus 100.
ASSET MTR Eh
Total assets of the household. =1 if the household head is married. Consumption demand for housing. The marginal tax rate is computed by running this method twice . For homeowners. it is the opportunity cost of owning a house. The diﬀerence in total tax liabilities divided by 100 gives the marginal tax rate. =1 if three or more children are living in the household.3.
CHILD0 CHILD1 CHILD2 CHILD3
=1 if no children are living in the household. =1 if the household head is a single female.2
Deﬁnition of Variables
Description Estimated earnings of the household head and spouse at the age of 45.
AGE MARRIED FEMALE NCHILD
Age of the household head in years.
A. Number of children younger than age 22 who live in the household. =1 if only one child is living in the household. See Appendix A. =1 if two children are living in the household. I then apply the appropriate tax rate schedule to calculate the household’s tax liability.
. See Appendix A.1.yields the taxable income.
=1 if the household head is white.
Estimating Permanent Income
The measure of permanent income is constructed using the method
outlined in King and Dicks-Mireaux .CHAGE13 HOMEOWN WHITE RISKY
=1 if the youngest child is older than age 13. The permanent income Y for individual i is deﬁned as Ln Yi = Zi βp + εpi − c(AGEi ). εpi is an unobservable variable measuring characteristics such as ability (εpi
2 has zero mean and variance of σs ).
YEAR92 YEAR95 YEAR98
=1 if the household is included in the 1992 survey. =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 if the household is included in the 1995 survey. =1 if the household head reports that he is willing to take risky investments. Thus. This measure is deﬁned as predicted earnings at the age of 45 plus an individual-speciﬁc eﬀect. =1 the household is a homeowner. and the second is transitory changes in earnings. earnings 106
. and c(AGEi ) is a cohort eﬀect.1)
where Zi is a vector of observable characteristics. βp is the parameter vector.
Observed earnings are assumed to diﬀer from permanent income in two ways.
Following King and Dicks-Mireaux . The same procedure is used for spouses.1) and (A. I combine (A. Instead. εpi and c(AGEi ). The selectivity-adjusted earnings functions are estimated for the sample consisting of individuals with nonzero earnings. c(AGEi ). permanent income is calculated from Zi βp . I calculate the minimum variance estimator of εpi using εpi = α(εpi + uit ).) measures the log of the age-earnings proﬁle. King and Dicks-Mireaux  use outside data to impose a cohort eﬀect. (A.2) and estimate the resulting earnings equation using each wave of SCF separately. ˆ is zero.3)
2 2 2 where α = σs /(σs + σu ).in year t are Ln Eit = Ln Yi + e(AGEit − 45) + uit . Earnings equations are estimated separately for household heads and spouses. For heads with zero ˆ earnings. Since age-earnings proﬁle e(AGEit − 45) and c(AGEi ) cannot be identiﬁed for this estimation. Finally. to get an estimate of εpi . and is assumed to be uncorrelated with εpi ). I assume that the cohort eﬀect.
To construct an estimate of permanent income. Their permanent income is adjusted for
. with one exception. ˆ (A.2)
where e(. and this provides the ˆ estimate βp . I assume
that α = 0.5. I need the estimates of βp . 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 .
and the probability of nonzero earnings is computed for each spouse from the probit estimates.non-participation at diﬀerent stages of the life cycle as follows: ˆ Yiw = Yi P rob(Ei > 0). ˆ where Yi is the permanent income estimate.
. Household permanent income is the sum of the estimates of permanent income for the head and spouse.
Deﬁnition of Variables
Description First diﬀerence in net worth between 1983-89 divided by 6. Household net worth in 1983. =1 if the household in the bottom 25 percent of the net worth distribution in 1983.Appendix B Appendix for Chapter 3
VRI MEANINC PERMINC TRANS NWORTH NWORTH25
Variance of log income. Mean of the predicted income from the earnings regression.
Age of the household head in 1983.
Variance of residual of log income from the earnings equation.
First diﬀerence in net worth between 1983-89 controlling for capital gains in home prices divided by 6. Mean of reported income between 1982-88. Mean of the residual income from the earnings regression.
=1 if the household in the 10 percent of the net worth distribution in 1983.
Number of children between age 13-18 in 1983. =1 if the household head is planning to leave a bequest. =1 if the spouse is working fulltime in 1983. =1 if the household had an additional child between 1983-89. Number of children living in the household in 1983. =1 if the household owns a home in 1989. =1 if the household head is married. =1 if the household head is white. Number of children between age 7-12 in 1983.
NADULT ∆NADULT BEQUEST HOWN83 HOWN89 SPFULLT
Number of adults living in the household in 1983.
.EDUC WHITE MARRIED NCHILD YOUNGCH MIDDCH HIGHSCH ∆CHILD
Years of education of the household head in 1983. =1 if the household owns a home in 1983. Number of children between age 0-6 in 1983. Change in the number of adults between 1983-89.
Name CHILD COLLEXP
Deﬁnition of Variables
Description Number of children ever born to the household head. Diﬀerence between net worth in 1986 excluding the capital gains on primary residence and net worth in 1983 divided by 3. 111
. Amount of expenditure on the college education of a child in 1986 dollars. =1 if the household is in the bottom 25 percentile of the wealth distribution.
=1 if the household is in the top 25 percentile of the wealth distribution.
Net worth in 1986. Diﬀerence between total income in 1985 and permanent income. =1 if the household head is female.
PERINC TRINC SAVE1 SAVE2
Predicted 1985 household income. Diﬀerence between net worth in 1986 and 1983 divided by 3.Appendix C Appendix for Chapter 4
C. =1 if the household head has a high school degree.
AGE FEMALE HIGHSCH
Age of the household head in 1983.
HIGHSCHSP =1 if the spouse has a high school degree. =1 if the spouse is working at a full-time job. SRETIRE SEMERGE SCHEDU =1 if retirement is the most important reason for saving. NSMSA NCHCOLL =1 if the place of residence is not in a SMSA. WINDF =1 if the household received a windfall greater than $3. =1 if the household head is married. SHOME =1 if saving to buy a home is the most important reason for saving.
. SOTHER =1 if the household cited another reason as the most important reason to save. =1 if the household head is willing to undertake risky investments. Number of children attending college between 1983-86. =1 if children’s education is the most important reason for saving. =1 if the household head is African-American.COLLEG
=1 if the household head has a college degree. =1 if emergencies are the most important reason for saving. BEDUCAT =1 if the household head thinks it is all right to borrow for education. COLLEGSP FSPOUSE BLACK MARRIED RISKY =1 if the spouse has a college degree.000 between 1983-86.
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She later continued her education at the University of Texas at Austin.
Permanent address: 834 Main Street Apt. g c She began her graduate studies at Boˆazi¸i University. where she received a g c Master of Arts degree in Economics in June 1997. the daugh¨ ter of Onder Yilmazer and Necla Yilmazer. she accepted an assistant professor position at Purdue University. She received her Bachelor of Arts degree in Business Administration from Boˆazi¸i University in January 1994. Turkey on June 2. IN 47901
This dissertation was typed by the author. 121
Tansel Yilmazer was born in Izmir. B Lafayette. 1970. Eﬀective August 2002.