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The Dissertation Committee for Tansel Yilmazer certiﬁes that this is the approved version of the following dissertation:
Household Saving Behavior, Portfolio Choice and Children: Evidence from the Survey of Consumer Finances
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. ____________________________________________________________ ProQuest Information and Learning Company 300 North Zeeb Road PO Box 1346 Ann Arbor. This microform edition is protected against unauthorized copying under Title 17.UMI Number: 3110711 ________________________________________________________ UMI Microform 3110711 Copyright 2004 by ProQuest Information and Learning Company. MI 48106-1346 . All rights reserved.
I would like to thank my advisor.Acknowledgments I am grateful to many people who shared the best and worst moments of ‘my dissertation years. Adam Winship. I would also like to thank my committee members Don Fullerton. I wish to thank Fikret for always being there for me.’ First. I am indebted to my family for their love and believing in me over these years. Mala Velamuri. Special thanks go to Asli Kes. in spite of the thousands of miles between us. Maxwell Stinchcombe. iv . Angela Lyons. G¨rkem Celik. guidance and encouragement. Matias Fontenla. Anne Gorney. Steve Trejo. patience. o ¸ and Vivian Goldman-Leﬄer for their stimulating conversations and friendship. for his support. Finally. Anne Golla. Daniel Slesnick. Peter Wilcoxen and Jacqueline Angel for their valuable feedback and comments.
’ and (iii) to accumulate for anticipated future needs.D. Ph. Portfolio Choice and Children: Evidence from the Survey of Consumer Finances Publication No. v .Household Saving Behavior. As a result of the portfolio constraint. (ii) to build up reserves as a precaution for a ‘rainy day. 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 ﬁrst chapter examines how the number of children living in the household aﬀects the way households allocate their wealth across diﬀerent assets. Tansel Yilmazer. 2002 Supervisor: Daniel T. Slesnick Using the Survey of Consumer Finances (SCF). The results show that the number of children increases the housing consumption of homeowners and the share of the portfolio allocated to owner-occupied housing. risky assets and interest-bearing accounts. this dissertation examines the relationship between having children and the motives of saving: (i) to hold assets because of the return they provide. The University of Texas at Austin. such as owner-occupied housing. such as educational expenses.
Using the actual college expenditures reported in the 1983-86 SCF. The third chapter examines the eﬀect of ﬁnancing children’s college education 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. By examining the implications of income uncertainty on the demand for children. and after controlling for family size. Also. savings for college increase with the age of the household head. The results show that households with higher income uncertainty are less likely to have a child. vi . the second chapter investigates the relationship between household saving and fertility decisions. the empirical model estimates the expected expenditures on children’s college education and investigates the eﬀect of expected college expenses on household savings. income uncertainty has little eﬀect on household savings. this chapter extends the empirical work on precautionary savings. Further. The results show that parents save for college expenses of their children. having an additional child reduces savings of households with young heads and increases savings of those with older heads. Using a life-cycle model that incorporates precautionary motives for saving.
2 Empirical Model . . . . .3 3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 3. .4 Estimation and Results . . . . . . . . . . . . . . 2. . . . . . . . . . . . . 3. . . . . . . . . . . . . . . 2. . . . . . . . . . . .2 3. . . . . . . . . . . . . . . . . . .2. . . . . . . . . . . . . . . Introduction iv v ix xi 1 6 6 12 12 15 17 24 30 44 44 48 51 58 63 Chapter 2.3 Data . . . . . . . . . . . . . . . . . . . . . 2. . . . . . . . . . The Relationship between Fertility and Saving . . . .2. . . . . . . . .1 Theory . . . . . . . . . . . . . . . . . . . . . . . .Table of Contents Acknowledgments Abstract List of Tables List of Figures Chapter 1. . . . vii . . . . . . . . . . . . . 2. . Data . . . . . . . . . . . . . . 2. . . . . Conclusion . . . . . . . . . Chapter 3. . Do Children Aﬀect Household Portfolio Allocation? 2. 2. .5 The Eﬀect of Precautionary Motives Saving and Fertility Introduction . . . . . Estimation and Results . . . . . . . . . . .4 3. . . . . . . . . . . .2 The Model . . . . . . . . . . . . . . . . . .5 Conclusion . . . . . . . . . . . . . . . . . . . . . . on Household . . .
. . . . 4. . .5 Estimation and Results . . . . . . . . . . . . . . . . . . Appendices College . . . . . . . . . . . . . .6 Conclusion . . . . . . . . . . . . . . . . . 105 . . 111 Bibliography Vita 113 121 viii . . . . . . . . . . . . . . . .3 Data . . . Appendix for Chapter A. . . . A. . . . . . . . . 109 Appendix C. . . . . . . . . . . . . . . . . . . . 4. . . . . . . . Saving for Children’s 4. . . . 4. . . 106 Appendix B. . . . . . 73 73 80 83 86 88 93 103 Appendix A. . . .1 Estimating Marginal Tax Rates . . . . . . . .1 Deﬁnition of Variables . . . . . . .1 Deﬁnition of Variables . . . 2 104 . . . . . . . . . . . . . . .3 Estimating Permanent Income . . . . . . .4 Empirical Speciﬁcation . . . . . . . . . .Chapter 4. . . Appendix for Chapter 4 111 C. . . . . . . . . . . . . . A. . . . . . . . . . . . .2 Deﬁnition of Variables . 104 . . . . . . . . . . 4. . . . . . . . . . . . . . . .2 A Model of Saving for College 4. . . . . . . . . . . . . .1 Introduction . . Education . . . . . . Appendix for Chapter 3 109 B. . . .
. . . . . . . . . . . . . . . Regressions of SAVE1 on Income Uncertainty with Endogenous Fertility Decision . . . . . . . . . . . . . .5 2. . . . . . . . . . Income and Income Uncertainty by Age and Fertility Probit: Fertility Decision of Fecund Households . . . . . . . . . . . .7 3. . . . . . Mean Asset Shares by Year . . . . Portfolio Shares for Assets by the Number of Children and Age Saving Motives by Age Groups. . Regressions of SAVE2 on Income Uncertainty with Endogenous Fertility Decision . Saving Motives By the Number of Children . . . . . . . . . Mean Asset Shares. . . . . . .2 3. . Descriptive Summary of Variables . . . . . . .1 3. . . . . . .4 3. . . . . .3 2. . . . . . . . . Tobit Estimates of College Expenditure Equation ix . . . . . . . . . . . . .6 3. . . . . . . . . . . .3 3. . Expenditure on Housing. . . . . .11 3. . . . . . . . . . . . .8 2. Descriptive Statistics by Household Fertility Decision . . . Results: Asset Shares and Housing Expenditure of Renters . . . . . . . .1 4. . . . . . . . . . . .7 2. . .2 4. .4 4. . 1998: Continued . . . Mean Income Uncertainty by Household Demographics . . . .8 4. . 1998 . . . . . . Children in . . . .6 2. . . . . . . . . Results from Probit Estimation . . . .1 2. . . . . . . . . . . .4 2. . . Savings. . . . . . . . . . . . .2 2. .10 2. . . . . . . . . . 1998 . . . Poisson Regression: Number of Children . . . . . . .5 Descriptive Statistics by Year . . . . . . . . . . . . . . . .List of Tables 2. . . . . . . . . The Eﬀect of a Change in the Fertility Decision on SAVE1 . . . . 1983 . . . . . . . . . . . . Results: Asset Shares and Housing Expenditure of Homeowners Homeowners: Continued . . . . . Mean Asset Shares. . . . . . Renters: Continued . . 33 34 35 36 37 38 39 40 41 42 43 65 66 67 68 69 70 71 72 95 96 97 98 99 .5 3. . . . . . . . Savings and College Expenses by the Number of College . .9 2. .3 4. . . . .
. . . . . .7 College Expenditures and Savings by the Number of Children in College . . . . . .6 4. Eﬀect of Anticipated College Expenses on Savings . 100 101 x . . . . . . . . . . . . . .4. . . . . . . . . . .
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. The ﬁndings. 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. By examining the implications of uncertainty on the fertility decisions of households and incorporating fertility decisions as a motive for household saving behavior. 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. This ﬁnding is consistent with the life-cycle theory of saving and consumption and shows that household composition is an important factor 3 . household saving show that saving rates are higher for married couples with no children and lower for those with children. however. 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. this chapter extends the empirical work on precautionary saving.cost of homeownership. The data on U. are not consistent with the predictions of the precautionary saving model that suggests agents faced with uncertainty about future income increase their savings. The results of the empirical model in Chapter 3 show that households with higher income uncertainty are less likely to have a child at a point in time. Also. Chapter 3 investigates the relation between household saving and fertility decisions. having an additional child decreases savings of households with young heads and increases savings of those with older heads.S.
about 65 percent reported using some previous savings. 90 percent of dependent undergraduate’s parents contributed ﬁnancially to the costs of their children’s education. According to the 1996 National Postsecondary Student Aid Survey. savings for college education increases with the age of 4 . Given the rapidly rising cost of college tuition. parents contribute a signiﬁcant amount to their children’s college expenses. The results show that parents save for college expenses of their children. families who save for college reduce their eligibility for ﬁnancial aid. This chapter uses the amount of parental expenditure on children’s college education as a measure for child quality. Using the actual college expenditures reported in the 1983-86 SCF.of life-cycle savings. The college ﬁnancial aid system imposes an implicit tax on the savings of households that are potentially eligible for ﬁnancial assistance. Second. First. Third. Chapter 4 examines the eﬀect of ﬁnancing children’s college education on household savings. Understanding the eﬀect of ﬁnancing children’s college education on household saving behavior is important for at least three reasons. Chapter 4 estimates the household’s expected expenditures on children’s college education and investigates the eﬀect of expected college expenses on household savings. Of those contributing to their children’s college costs in 1987. Also. the quality-quantity model of fertility behavior assumes that parents have preferences both for the expenditure per child and the number of children. an analysis of ﬁnancing college education and family size highlights an important aspect of the quality-quantity model.
These results are consistent with the predictions of the life-cycle theory of saving and consumption that households save in advance for expected expenses to smooth their consumption. 5 .the household head.
For example. Chiteji and Staﬀord  for race.1 The inﬂuence of children living in the household on the portfolio composition has not been yet discussed. and Ioannides  for age eﬀect. 1 6 . risky assets. 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 interest-bearing accounts.Chapter 2 Do Children Aﬀect Household Portfolio Allocation? 2. households with children may purchase more housing than households with no children or they may have a higher probability of owning a home. Jianakoplas and Bernasek . race and gender of the household head on the portfolio composition. So far. they may hold most of their ﬁnancial assets in riskless See Poterba and Samwick . King and Leape . Conversely. Parents may choose to invest part of their household portfolio in stocks to meet the rising costs of a college education. the literature has focused on the impact of demographic variables such as the eﬀect of age. and Sund`n and Surette  e for gender eﬀects.1 Introduction Empirical studies of household portfolio composition have identiﬁed large diﬀerences in portfolio allocation choices of diﬀerent demographic groups.
Speciﬁcally.S.form to decrease their families’ exposure to risk. 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. If households with children allocate a larger share of their portfolio to owneroccupied housing. I focus on how the number and age of children living in the household aﬀect (i) the homeownership decision. The failure of households with children to invest suﬃcient assets in retirement accounts may lead to a lower retirement wealth. as the result of higher consumption demand for housing. It has also important policy implications. 1995 and 1998 SCF. Using data from the 1989. Also. this chapter investigates the eﬀect of children on household portfolio composition. paying particular attention to the impact of children on the demand for housing services and homeownership decision. I analyze a model in which households decide on portfolio shares for diﬀerent assets jointly with the tenure choice (the decision of owning or renting) and the consumption demand for housing services. and (iii) the housing expenditure of homeowners and renters. (ii) the portfolio shares for housing and the other assets that homeowners and renters hold. 1992. households have generated signiﬁcant concern in the last twenty years. Understanding the size of the impact of children on household portfolio allocation is intrinsically interesting. Low levels of retirement savings of U. households with children may decrease the portfolio share for other assets considerably while they increase the portfolio share for housing. 7 .
Explaining the size of the portfolio eﬀect allows a better understanding of the cost of children.Most U.2 In the presence of tax distortions and transaction costs. the general equilibrium model of Berkovec and Fullerton  and the numerical analysis of Flavin and Yamashita . The optimal level of owner-occupied housing for households may be higher than the optimal level for households that are only interested in long run returns. Households with children are likely to have a higher demand for housing services and the consumption constraint can be even more binding. and the ownership of their principal residence determines the level of consumption of housing services. Wolﬀ  uses the 1983. 2 See Henderson and Ioannides  and Berkovec and Fullerton  8 . According to the 1995 SCF. 1989. and the value of an average homeowner’s property is 60 percent of its total assets. 65 percent of households are homeowners. 1992 1995 SCF. While the dual role of housing has been recognized. and both report that owner-occupied housing accounts for about 30 percent of household assets. In his model.S. and King and Leape  examine the 1960-62 Michigan Surveys of Consumer Finances. households cannot separate the level of consumption of housing services from investment in housing as an asset. Brueckner analyzes the behavior of homeowners. Exceptions are the theoretical model of Brueckner . households hold a large portion of their wealth in the form of owner-occupied housing. its impact on the portfolio choice between housing and other assets has not been discussed much. Owner-occupied housing diﬀers from other types of wealth in its dual role as both a consumption good and an investment good.
 show that 9 . Harun et al. the homeowner’s optimal portfolio is ineﬃcient in a mean-variance framework.  treat the presence of children in the household as endogenous and ﬁnd that a 10 percent increase in the probability of having a child raises the likelihood of homeownership by 2. Robst et al. households decide on tenure and quantity of housing taking both consumption and investment motives into account. 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.an investment constraint requires that the quantity of housing owned is at least as large as the quantity of housing consumed. Their simulation concentrates on the eﬀect of taxes on the tenure choice and owner-occupied housing. For example. Neither of these studies explicitly analyzes the determinants of the consumption demand for housing and the portfolio share for housing. Flavin and Yamashita use numerical methods to calculate the mean-variance eﬃcient frontier. His model analyzes the resulting distortion of the eﬀect of this investment constraint on the portfolio choice of homeowners. 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.5 percent. In Berkovec and Fullerton. 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.
Ihlanfeldt  reports housing demand estimates obtained separately from two samples-recent movers and nonmovers. marital status. their results show that the presence of children in school has either an insigniﬁcant or a negative eﬀect on the demand for housing.S. Among recent movers. 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. The information cost of monitoring and managing a portfolio is suggested as an important reason for holding riskless assets. Many studies have investigated the reasons that most households choose to hold incomplete portfolios. however. only 41 percent of households held stocks directly or indirectly in IRAs.an additional child increases the probability of owning a home by around 8 percent. However. according to the 1995 SCF. Goodman and Kawai  ﬁnd that larger households prefer more housing. these variables do not aﬀect the housing demand of homeowners. U. For example. little systematic treatment of children has appeared in the estimation of tenure choice and housing demand. The results of the previous studies show that dependent children have some impact on the demand for housing. households typically invest in only a few of the assets available in the economy. as noted in Goodman . Besides 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 10 . Demographic characteristics such as age. deﬁned beneﬁt pensions and mutual funds. After controlling for the household size. 401(k)s.
the eﬀect of age and marital status appears to be signiﬁcant only for some of the assets. taking into account the eﬀect of children on the consumption demand for housing. For example. Their ﬁndings show that age and marital status of the household head signiﬁcantly aﬀect the probability of asset ownership. The results show that the number of children has a positive and signiﬁcant eﬀect 11 . Their ﬁnding is that parents who held stocks are more likely to have children who hold stocks as young adults. King and Leape  analyze a model in which investors choose to hold incomplete portfolios. 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. and they estimate equations for both the probability of owning an asset and its demand conditional upon ownership. Children living in the household have not been the focus of any study examining the portfolio choice of households. Using the Panel Study of Income Dynamics. however. This chapter aims to do so by examining the eﬀect of the number and the age of children on household portfolio choice. Chiteji and Staﬀord  link independent young African-American adults back to their parents. In the conditional demand equations. The empirical model compares the portfolio allocation of homeowners to that of renters.discourage households from investing in risky assets. Bertaut  uses the 1983-89 SCF to analyze the eﬀect of household characteristics on portfolio allocation.
Children living in the household also aﬀects the portfolio choice of renters. A summary of the ﬁndings and concluding remarks are presented in Section 2. As a result of the portfolio constraint imposed by the housing demand of children.5.4.3 describes the data set and the variables used in the empirical work. Controlling for the number of children and other variables. Following Brueckner  and 12 .2 2. The consumer maximizes a multiperiod utility function.on the probability of owning a home.2 introduces the theoretical model and discusses the empirical speciﬁcation of the model. homeowners with all children older than age 13 invest a greater share of their portfolio in vehicles and other real estate and a smaller share of their portfolio in housing. The number of children also increases the housing demand of homeowners. homeowners decrease the portfolio share in retirement accounts while they increase the portfolio share in housing. and how much to allocate to other risky assets. Section 2. The estimation results are reported in Section 2. 2. Section 2. The remainder of this chapter is organized as follows.1 The Model Theory This section examines the behavior of a consumer deciding whether to rent or own a home. 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. Renters invest a smaller share of their portfolio in interest-bearing accounts with an increase in the number of children.2.
. E gives the expected utility. If the consumer purchases a house.Henderson and Ioannides . I assume that third and subsequent periods are buried in the indirect utility function given remaining wealth at the beginning of the second period. (2. 1. 1. and consumption in future periods that depends on the random total return R from the investment portfolio. hc ) + δE[V (R + y)]. The j th asset earns a gross return of rj . U gives the utility from the current consumption. . and h ≥ 0.. Short selling is ruled out for all assets including housing. V is an indirect utility function. The only source of uncertainty is assumed to be from returns on J + 1 assets and owner-occupied housing (h).. 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 .2) 13 . and δ is the discount factor. The dollar amount of asset j purchased is denoted aj . with a0 being the riskless asset. The ﬁrst period budget constraint is given by J c=w− p o hc h − j=0 aj . housing services (hc ). The consumer’s objective function can be written as follows: U (c. so that aj ≥ 0.1) where y is future labor income. . j = 0. j = 0.. J. (2. J. A consumer in this economy is assumed to obtain utility from the current consumption of a single nondurable good (c).
and θjh is the covariance of returns between asset j and housing... j = 1..where w is her initial wealth and po is the current price of a unit of housing. . (2. The total return of the J portfolio is given by R= j=0 rj aj . 2. are the variances of rh and rk .6) and (2. J. then the ﬁrst period budget constraint is given by J c = w − po hc − r j=0 aj . the total portfolio return R is a normal random variable with the expected value J R = rh h + r0 a0 + j=1 r j aj (2. For renters. h = 0 in equations (2.7).J. j = 1.4) where po r is the price of a unit of housing for renters.3) If the consumer rents a house. the return on housing and the return on other assets are assumed to be normal variables with the expected values rh and rj . For homeowners. respectively. θjk is the covariance of returns between asset j and k. 14 . .5) since h is equal to zero for renters.7) where θhh and θjj .6) and the standard deviation J J K σ = (θhh h + 2 j=1 2 haj θhj + j=1 k=1 aj ak θjk )1/2 . (2. (2. h The total return of the portfolio is given by J R = rh h + j=0 rj aj . In the model. (2..
that maximize (2. In the ﬁrst stage. The empirical model described in the next section focuses on the interaction between these two stages of decision making. 1. are chosen optimally with hc and σ held constant. a household determines whether to own or rent a house: H = 1 if Xh β1 + ε1 > 0 = 0 otherwise.7) and decides to own or rent a house comparing the utilities in two outcomes. σ. The consumer’s problem is to choose c∗ .3). J.5).4). and a∗ . 1. I rewrite the objective function (2.8) where φ(. j = c j 0. h∗ . c j (2.. the asset levels aj . this problem can be solved in two stages. 2. that maximize (2. j = 0. . First. For both homeowners and renters.9) where Xh is a vector of year dummies and characteristics that are associated 15 ..7). and the standard normal variable z as follows: U (c.2. hc (and thus σ) is chosen optimally. In the second stage. 1.1) in terms of R. J...6) and (2. h∗ and a∗ . . (2.. how much to spend on housing (Eh ).) is the standard normal density function. and shares of wealth to allocate to each asset j (sj ). J. (2. hc ) + δ V (R + σz + y)φ(z)dz. The consumer also decides on c∗ .2).Following Fama and Miller  and Brueckner .6) and (2.1) subject to (2. .2 Empirical Model The joint determination of whether own a house (H=1) or not (H=0). j = 0. (2. and to owner-occupied housing (sh ) is modeled as follows.8) subject to (2. (2. (2...
βoj . . φ(X β1 )/(1 − Φ(X β1 )) is used as a regressor for renters in estimating (2..10) (2. β1 is a parameter vector. j = 0. Similarly. . βrj . as a regressor in estimating (2.. εh ..11) where X and Xc are vectors of household characteristics and year dummies.10) for homeowners. the household decides on the share of portfolio allocated to each asset and housing. a probit model of the tenure choice in equation (2. where φ and Φ are probability density and cumulative distribution of the standard ˆ ˆ normal distribution. 1. respectively..with the probability of owning a house. j = 0. In the second stage. βoc and βrc are the parameter vectors to be estimated. J sj = Xβoj + εoj sh = Xβh + εh If owner. J. εrj . Separate equations are speciﬁed for homeowners and renters.. 1.. In the ﬁrst stage. 16 .11) are assumed to have a joint normal distribution.. log Eh = Xc βoc + εoc . 1.9) .. J sj = Xβrj + εrj sh = 0 If renter. J. εoc . log Eh = Xc βrc + εrc .. (2. 1. I use ˆ ˆ φ(X β1 )/Φ(X β1 ).11). and also the housing expenditure: j = 0. and εoj . and εrc are the error terms.9) provides an estimate of β1 . The two stage method described in Lee and Trost  is used to estimate the model. and the error terms in equations (2. j = 0. and ε1 is an error term.. .. .(2. Second. βh ..
3) RETIRE includes IRAs. 1995 and 1998 SCF. 1.480 out of 3.143 households. income. 401(k)s. For owners. 5) VEHICLE is the value of all the vehicles the household owns.906. 1992.3 Data The data for this study are taken from the 1989. in 1992. The consumption demand for housing is computed for renters and homeowners as follows. and other assets like arts and precious metals. population. money market deposit accounts. a triennial survey conducted by the Federal Reserve Board. The survey contains detailed information on household portfolios. and other deﬁned contribution plans. all types of bonds. The SCF constructs sample weights to blend the supplements with the area-probability sample to get a more representative sample of the U. cash value of life insurance.519 out of 4. 4) HOUSE is the market value of owner-occupied housing. call accounts.S. saving accounts.2.S.3 Total assets are grouped into six categories: 1) ACCOUNT includes all holdings of checking accounts. the cost of housing services depends on In the 1989 SCF. the supplement consists of 866 out of 3. Investments in businesses are not included in total assets because they generate an income that is diﬃcult to separate from earnings.409 out of 4. population and a supplement of high-wealth households drawn from Internal Revenue Service ﬁle of high-income returns. Keogh. 1. and in 1998. 3 17 . certiﬁcates of deposit. and mutual funds. and demographic characteristics. 2) STOCK includes all assets held in stocks. and 7) OTHER includes trusts. Each survey consists of a representative sample of the U. 1.299.309 households. 6) RESTATE includes the market value of seasonal residences and other property. in 1995.
Following Henderson and Ioannides . the income tax rate (τ ). maintenance and depreciation costs (d). r. is the annual inﬂation rate calculated using the CPI-U deﬂator. (2. I assume an annual rate of depreciation of d=0. To calculate the housing expenditure by using equation (2. and the rate of increase in house prices. First. I make several assumptions. I impute them using detailed account information on the sources of income and demographics for each household. households that neither rent nor own their homes are excluded for lack of information to cal18 . The calculation of marginal tax rates is described in Appendix A. the mortgage interest payment (m). The housing expenditures (Eh ) of homeowners are then deﬁned as Eh = [(1 − τ )r + d + (1 − τ )τp − (ρ − π)]G − mτ. the rate of increase in the nominal price of housing (ρ) and the overall inﬂation rate (π).015 for each of the sample years. A few restrictions are imposed on the sample. ρ. Property tax rates and mortgage interest payments are reported in the SCF.12) This formulation assumes that homeowners claim tax deductions for property taxes and mortgage interest payments. is the rate of increase in the median sale price of houses in that year. The inﬂation rate.1.12). is assumed to be the interest rate on treasury bills. the interest rate (r).the gross value of the residence (G). π. The interest rate. the property tax rate (τp ). For renters. Since marginal tax rates are not reported in the SCF. the annual rental expenditure reported in the SCF is used as the consumption demand for housing.
respectively. The calculation of permanent income follows King and Dicks-Mireaux  and is described in Appendix A. The variables are described in detail in Appendix A. 116. 4 19 . 1995 and 1998. 1995 and 1998. Table 2. 214. In 1989. Therefore.1 shows the summary statistics for all the variables used in the estimation. 127. or (iii) it owns part or all of the farm/ranch on which it lives on. a co-op or a townhouse association.900. and 1998 SCF. (ii) it owns both the mobile house and the site. 1992. marital status (MARRIED) and gender (FEMALE) of the household head and the fraction of homeowners (HOMEOWN). most of which have not changed much over time.1 percent weighted wealth holdings in each wave of the SCF are dropped. 3. 1992.4 Second. The same pattern is true for permanent income (INCOME). The calculated expenditure of housing consumption (Eh ) A household is assumed to be a homeowner if (i) it owns the house/apartment that it lives in or owns it as a part of a condo. 5 Of the remaining households. 3. Sample demographics show the age of the household head (AGE). 209 and 193 were in the 0.773 and 3. 6 The SCF deﬁnes the head of the household to be the husband for all married households. households with the highest 0. both mean and median wealth (ASSET) have risen since 1992. 2.6 However.1 percentile of the weighted wealth distribution in the 1989. to avoid the inﬂuence of extreme outliers on the regression.culate housing expenditure.807 households in 1989.989 observations.5 The ﬁnal sample consists of 13. I take the estimated earnings of the household head and the spouse at the age of 45 and an individual-speciﬁc eﬀect. 1995. respectively.3.509. 183. 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. 317 and 309 households were neither renters nor owners and were dropped from the sample. As a proxy for permanent income. respectively.2. households with female heads are headed by single females. 1992.
2. The second largest asset in the households’ portfolios is VEHICLE (18.7 percent of total assets in 1989 to 10. wealth and children (the number of children living in the household) groups. The average number of children (NCHILD) living in the household declined from 0.3 percent in 1989 to 11. the composition of households’ portfolios reveals the importance of housing as an asset. but it rose to 13. representing 39. Assets in these accounts increased from 5. The percentage of households with all children older than age 13 (CHAGE13) has stayed the same since 1992.was higher for homeowners in 1992 than in other years due to the decline in house prices in that year. The ﬁrst column shows the share of households in diﬀerent income. This suggests that households have substituted ﬁnancial assets for nonﬁnancial assets.75 in 1995 and stayed the same in 1998. First. age. followed by ACCOUNT.2 percent in 1995. Second. 20 . Table 2. there is a steady growth in the portfolio share for STOCK and a steady decline in the portfolio share for RESTATE since 1989.2 presents interesting changes in household portfolio structures over time. The increases in ACCOUNT.5 percent in 1998.3 presents housing expenditures of homeowners and renters in 1998. The portfolio share for ACCOUNT declined from 14.83 in 1989 to 0. VEHICLE and RESTATE. HOUSE is the most important asset.4 percent of total assets in 1998. Table 2. the share for RETIRE increases sharply.2 percent in 1998 due to an increase in the portfolio share for saving accounts.6 percent in 1998). As shown in Table 2. STOCK and RETIRE in 1998 oﬀset the decline in HOUSE.
wealth and the age of the household head.4 and 2. For renters. VEHICLE is the third largest asset (7. there are marked diﬀerences in household portfolios of renters and owners. For homeowners.0 percent). First. Since the primary residence is the largest part of homeowners’ wealth. Tables 2.The second column indicates the percentage of each of these groups that are homeowners.030 for renters.8 percent of total assets) following 21 . reaching a peak among households with two children.000 and income below $50. VEHICLE is the most important asset held (41. The ﬁrst row of Table 2. respectively.000. Among households with wealth below $250. 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. It also increases with the number of children. The housing expenditures of renters and homeowners also increase with income. wealth and the number of children in the household. age of the household head. accounting for 57. for renters. wealth. For homeowners.5 show the household portfolio composition in 1998 by household permanent income.5 percent of total assets) followed by ACCOUNT (26.9 percent.042 for homeowners and $6. and the number of children.4 shows the portfolio shares of assets that homeowners and renters hold. The average housing expenditure is $7. renters spend more on housing than owners. it declines after age 50. The percentage of households who are homeowners increases with income. Average housing expenditures for homeowners and renters are presented. in the remaining two columns of the table. however. the expenditure on housing declines after the age of 65.
portfolio composition of households with heads over the age of 65 diﬀers considerably from other age groups’ portfolios.6 percent. while the housing share of portfolio declines.9 percent of their total assets in housing. This suggests that households with heads over age 65 substitute 22 . the portfolio share for ACCOUNT almost doubles both for homeowners and renters over the age of 65 compared to 50-64 year old group. RETIRE and RESTATE are almost equal for renters and owners. Several ﬁndings are worth noting. the fraction of households who are homeowners increases.7 percent are homeowners. but they hold only 42.RETIRE (10.4.3 and 2. among homeowners that have wealth exceeding $1 million. Not surprisingly.7 percent are homeowners holding 75. as shown in Tables 2. STOCK is the most important asset category with a share equal to 25.2 percent). Also.6 percent of total assets in housing. Of the households with income above $100. Another noteworthy ﬁnding is that the portfolio shares for STOCK and RETIRE for both homeowners and renters rise with income. in contrast. we observe striking diﬀerences in the composition of portfolios by the level of wealth. accumulation in STOCK relative to other assets increases over age 65. the share of the portfolio allocated to STOCK rise at a rapid rate with wealth.2 percent of total assets while housing accounted for only 22. For homeowners. 42.4 also presents the life cycle patterns in household portfolios. The portfolio shares for other assets such as STOCK.000. Also. the share of the portfolio allocated to RESTATE and for all households. Table 2. 86. First. For example.000. of the households with income below $15. For example. For higher levels of income.
3 investigates the eﬀect of children on the tenure choice. the portfolio share for HOUSE declines with age among the households headed by persons below age 65. and age groups. and 65. and table 2.0 percent of the wealth for households with no children.5 looks at the link between children and shares of assets in both renters’ and homeowners’ portfolios. housing accounts for 56.9 percent for households with 2 children. While portfolio composition diﬀers considerably between renters and homeowners.liquid assets for nonﬁnancial assets. the relative changes in portfolio shares of assets by income. Children are likely to aﬀect the portfolio structures in two ways. The portfolio share for owner-occupied housing increases with the number of children. Also.4 and 2.3 percent for those with three or more children. Table 2. Second. The table indicates a strong relation between children and the share of portfolio allocated to housing. The ﬁrst is their eﬀect on the choice of tenure.5 shows the portfolio shares by the number of children living in the household. For example. wealth. Tables 2. Homeowners invest a smaller share of their portfolio in interest-bearing accounts and stocks with an increase in the number of children. Table 2. and the second is their eﬀect on asset shares of portfolios conditional upon ownership. The results indicate that the number of children living in the household aﬀects the portfolio shares for assets and 23 .5 reveal striking diﬀerences in portfolio structures across income. 60. but it stays steady after age 65. Finally. age and wealth are similar. the presence of children increases the share of the portfolio allocated to vehicles.
the probability that a household owns a home.898 households. The empirical model below investigates the eﬀect of children on both asset shares and homeownership decision. and 106 in 1998 had zero wealth holding. 111 in 1992. Thus. I drop one group of assets. Portfolio choice theory has shown the importance of age. permanent income and wealth in determining the asset shares in household portfolios. and RESTATE in the estimation of the model. HOUSE. RETIRE.4 Estimation and Results The resulting set of equations constitutes an endogenous switching model in the form of a multivariate regression model. Of 13. Previous research also indicates that a household’s marginal tax rate (MRT) has an eﬀect on its asset allocation decisions. Moreover. and include ACCOUNT. Age and age-squared of the household head are included to capture a possible change in portfolio behavior related to the life cycle. 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. 2. STOCK. and the disturbance covariance matrix is singular. OTHER. 410 report zero wealth holding. the marital 7 93 households in 1989. 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. 24 . VEHICLE. 100 in 1995. Then I solve for the parameters of OTHER from the other equations.
status and the gender of the household head and willingness to undertake risky investments (RISKY) may also aﬀect the household’s asset allocation. All variables that enter X are also included in Xc and Xh , with two exceptions. First, the marginal tax rate aﬀects the tenure choice and homeowners’ expenditure on housing since homeowners can claim tax deductions for mortgage interest payments and property taxes. However, the marginal tax rate is not expected to aﬀect the housing expenditure of renters. Thus, marginal tax rate is not included in Xc . Second, willingness to undertake risky investment does not enter Xc because it has an eﬀect on the tenure choice regarding the investment motive but not on the expenditures on rental housing. In addition, the vector Xh includes the race of the household head. Table 2.6 presents the estimates of the probit model of equation (2.9). The estimates of the homeownership equation are consistent with previous studies. As a household’s permanent income rises, the probability of homeownership increases. Age of the household head increases the probability of ownership until age 74. The coeﬃcients for WHITE and MARRIED are significant and positive, indicating that at the sample mean, households with white heads are 10.2 percent more likely to own than households with non-white heads, and those that are married are 26.1 percent more likely to own than those that are not. The coeﬃcients on the variables showing the number of children are positive and signiﬁcant. Households with one child are 6.3 percent, and those with two children are 10.8 percent, more likely to own relative to households with no children. The probability of owning starts to decrease 25
after the second child, household with three or more children are only 9.6 percent more likely to own relative to households with no child. The probability of being a homeowner also increases with the household’s marginal tax rate, suggesting that the tax-deductibility of property taxes and mortgage interest is more valuable at a higher marginal tax rate. Tables 2.7- 2.10 show the coeﬃcients and the standard errors for each of the seven asset equations and the housing expenditure equation for homeowners. Permanent income has signiﬁcant but small marginal eﬀects on the structure of homeowners’ portfolio. The share of the portfolio allocated to RETIRE, HOUSE and VEHICLE increase with income, while the share allocated to ACCOUNT, STOCK and RESTATE decreases with income. Higher levels of wealth are associated with higher shares in ACCOUNT, STOCK, RESTATE, OTHER, and lower shares in HOUSE and VEHICLE. The marginal eﬀect of wealth on the share allocated to STOCKS, HOUSE and RESTATE is large. A 10 percent increase in assets would increase the share of the average portfolio allocated to STOCK by 0.62 percentage point. A similar increase in assets would induce 1.25 percentage point decrease in HOUSE and 0.66 percentage point increase in RESTATE. Age is an important determinant of portfolio shares in a homeowner’s portfolio, and the results in Table 2.7 and 2.8 reveal a quadratic relationship in terms of age. Portfolio shares for RETIRE, HOUSE and RESTATE increase with age, reaching a peak at the age of 50, 63 and 50, respectively. Portfolio shares for ACCOUNT and STOCK, however, decrease with age until the age of 26
50 and 43, respectively. This relation between age and portfolio shares suggests that the structure of a household’s portfolio changes when the household head reaches middle age. For example, households headed by persons above the age of 45 start substituting liquid assets for nonﬁnancial assets such as HOUSE and RESTATE. The coeﬃcients on the number and age of children suggest that the presence of children plays a signiﬁcant role on the portfolio structure of homeowners’. Several results are of particular interest. First, relative to households with no children, households with one child have a 5.6 percent higher portfolio share of HOUSE, controlling for age and permanent income. Similarly, households with two and three or more children have 8.9 and 9.2 percent greater portfolio shares in HOUSE. Second, the portfolio shares for ACCOUNT, RETIRE, and VEHICLE decrease with an increase in the number of children. Controlling for the number of children, households with all the children older than age 13 hold a smaller portfolio share in HOUSE and a greater share in VEHICLE and RESTATE. Finally, homeowners that are willing to undertake risky investments hold a greater share of risky ﬁnancial assets, such as STOCKS and RETIRE, and a smaller share of less risky assets, such as ACCOUNT and HOUSE. All other things held constant, the portfolio shares allocated to ACCOUNT and RESTATE have declined in 1998. Households have substituted STOCK, RETIRE and VEHICLE for the other asset categories since 1995. An increase in the marginal tax rates leads to an increase in the portfolio share allocated 27
The quadratic relationship observed between the shares of assets in homeowners’ portfolio and the age of the head holds true for the ﬁnancial assets in a renter’s portfolio. Tables 2. More permanent income is associated with a higher share for ACCOUNT. renters have shifted toward RETIRE in their portfolio. RESTATE and OTHER. and the share for VEHICLE is signiﬁcantly higher for households with three or more children. Since 1995. For these assets.10 present the estimates of the equations (2.10 report coeﬃcients of the selectivity variables. The portfolio share for RETIRE increases with age until the age of 58. It leads to a decrease in the share allocated to ACCOUNT. An increase in total assets leads to an increase in the share for STOCK.0 percent higher in renters’ portfolio. while the portfolio share for ACCOUNT and STOCK decreases until the age 40 and 43. The eﬀect of children is less pronounced for renters than for homeowners.7-2. As renters have two or more children.11) for renters. the share for ACCOUNT decreases. Tables 2. should they choose to buy homes. The coeﬃcients on the selection terms in equations for ACCOUNT. Compared to 1989. for example.9 and 2. homeownership would not have the same eﬀect on renters. RETIRE and HOUSE for homeowners are all statistically signiﬁcant.to HOUSE and VEHICLE. respectively. RESTATE and OTHER and a decrease in the share for ACCOUNT and VEHICLE. and a lower share for VEHICLE. The estimates of the Mills ratios for renters are signiﬁcantly diﬀerent from zero 28 . RETIRE and RESTATE. Selfselection occurred in households’ tenure choice. STOCK. the 1998 portfolio share for RETIRE is 5.
Table 2. 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.8 and 2. I mean a household headed by a white married.3 percent with the second child. RETIRE. On the other hand. Homeowners with one child have 11. but the number of children has no eﬀect on renters’ expenditure. By a typical household.for ACCOUNT. all of the children in the household are younger 29 . This implies that other than in regards to these three assets. The housing expenditure of homeowners increases 8. For homeowners. The last two columns in Tables 2. there were no signiﬁcant diﬀerences in the average behavior of the two groups prior to home purchase.11 presents the estimates of shares for assets that a typical homeowner holds.9 percent higher housing expenditure than homeowners with no child. and RESTATE. After the second child.2 percent. For both renters and owners.10 present the estimates of the housing expenditure equation. the expenditure on housing increases with the number of children. the signiﬁcance and the same sign of the selection terms indicate that self-selection occurred in a hierarchical sorting: the positive selectivity bias indicates that those who own a house spend less compared to average household had it chosen to own. 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 age of the children in the household has no eﬀect on the housing expenditure of renters nor homeowners. having more children increases the housing expenditures of homeowners by only 3.
HOUSE is the most important asset. Second.690) and has a 15 percent marginal tax rate.11 include both of these eﬀects. and the share allocated to RETIRE becomes the second largest in the portfolio. an increase in the number of children increases the probability that a household owns a home. children have two eﬀects on the portfolio structure of households. The portfolio shares of assets calculated in Table 2. children change the demand for each asset. 1992. As mentioned above.than age 13. One contribution of this chapter is to study the eﬀect of the portfolio constraint imposed by the consumption demand for housing on the portfolio shares in housing and other assets. VEHICLE is the second most important asset in the portfolio when the household head is 30 years old. this chapter investigates how the number and the age of children living in the household inﬂuence the portfolio composition of households. The chapter examines the impact of children on the homeownership decision and the constraint of consumption demand for owner-occupied housing.160) and permanent income ($46. As the household head reaches middle age. The number of children has a negative eﬀect on the portfolio share for RETIRE. more is invested in RETIRE. At all ages.5 Conclusion Using the 1989. Using a 30 . 2. and its importance in the portfolio increase with the number of children living in the household. The household head is willing to take risky investments and holds mean wealth ($188. 1995 and 1998 SCF. First. conditional on the tenure choice.
However.S. households are saving enough for retirement. As homeowners have more children. An important implication of the ﬁndings of this chapter is that the constraint imposed by the consumption demand for housing decreases the share of portfolio allocated to retirement wealth as the number of children in a household increases. Considerable research has focused on whether U. 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. Therefore. the chapter compares the determinants of portfolio allocation of homeowners to that of renters. the portfolio share for ﬁnancial assets such as interest-bearing accounts and retirement accounts decreases. the ratio of retirement accounts to total assets in renters’ portfolios does not signiﬁcantly decrease with the number of children. This result suggests that. the consumption demand for housing is higher than the investment demand. One direction for further research is to include the liabilities and bor31 . and the portfolio share for housing increases. Since households cannot separate the level of consumption of housing services from their investment in housing as an asset.switching regression model that takes into account the consumption demand for housing. for households with children. the policies that change the cost of housing and aﬀect ownership decision inﬂuence not only the portfolio share for owner-occupied housing but also the portfolio share for retirement assets. the ratio of housing to total assets increases as the number of children increases.
Most households ﬁnance their home purchases with mortgage debt. 32 .rowing constraints of households into the model of portfolio choice. The impact of children on the portfolio share for housing may be an important determinant of household mortgage debt.
154 0.59 0.83 0.65 0.75 0.75 0.319 50. 1989-1998.2.900 0.525 101.054 49.164 0.191 92.151 203. Notes: 1) Tabulations are weighted using sample weights.59 0.59 0.3 0.80 0.664 6.51 2.64 0.695 47.27 0. 33 .8 0.968 46.28 0.14 0.50 3.5 0.985 6.97 48.28 0.97 Source: Survey of Consumer Finances. permanent income and net worth.11 0.28 0.55 3.131 5.158 0.807 0.658 222.815 258.Table 2.328 206. All variables are deﬁned in Appendix A. 2) All dollar values are reported in 1998 dollars.9 0.97 48.12 0.773 0. The text deﬁnes total assets.12 0.58 0.660 12.829 116.509 0.1: Descriptive Statistics by Year 1989 Income and Assets INCOME ASSETS (Mean) ASSETS (Median) MRT Eh Demographics AGE MARRIED FEMALE NCHILD CHAGE13 HOMEOWN RISKY Number of observations % with positive wealth 1992 1995 1998 47.97 48.750 0.61 3.66 0.684 92.65 0.
STOCK.043 0.208 0.197 0.059 0.143 0.059 0. Notes: 1) Tabulations are weighted using sample weights. VEHICLE. 2) The text deﬁnes the assets called ACCOUNT.2: Mean Asset Shares by Year 1989 Portfolio Shares ACCOUNT STOCK RETIRE HOUSE VEHICLE RESTATE OTHER 1992 1995 1998 0.132 0.410 0. 1989-1998.130 0.043 0.076 0. RETIRE. RESTATE.047 0. HOUSE.057 0.112 0.186 0.068 0.105 0.053 0. 34 .196 0.Table 2.432 0.067 0.415 0. and OTHER.072 Source: Survey of Consumer Finances.050 0.076 0.094 0.072 0.394 0.
024 6.90 12.843 9.764 6. HO represents homeowners and RR represents renters.555 93.263 5.12 80.26 21.378 $50-100K 29. 1998.93 1.002 6.49 36.72 14.741 7. 35 .46 14.72 78. 2) HH represents all households.16 12.04 5.976 7.42 78.43 9.803 8.03 21.883 Above $100K 8.748 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 22.54 5.24 86.35 42.078 7.79 64.847 15.77 67.28 9.489 32.78 7.866 4.546 80.475 5. Notes: 1) Tabulations are weighted using sample weights.Table 2.89 6.645 61.587 95.081 6.22 64.69 3.391 Source: Survey of Consumer Finances.46 72.065 7.17 15.50 51.40 34.3: Expenditure on Housing.293 $15-30K 22.195 5.29 4.438 8.042 6.400 5.09 64.72 3.677 6.564 5.486 95.931 6.55 6.973 6.29 68.69 4.38 29.030 Income Below $15K 10.456 11.496 6.08 22.183 7. 1998 Eh 1998 dollars %HH %HO HO RR All households 100 66.081 $30-50K 29.90 19.22 7.
149 0.055 0.071 0.086 0.135 0.122 0.135 0.050 0 0.190 0.017 0.066 $50-100K 0.162 0.022 0.213 0.080 0.002 0.750 0. 1998 ACCOUNT STOCK RETIRE HOUSE VEHICLE HO RR HO RR HO RR HO RR HO RR 0.293 0.485 0.192 0.270 0.056 0.015 0.109 36 All households Income Below $15K 0.295 0.071 0 0.074 0.075 continued on the next page.033 0.019 0.032 0.089 0.040 35-49 0.374 0.091 0.028 0.579 0 0.212 0.077 0.694 0.020 0.587 0.042 $50K-100K 0.093 $15-30K 0.359 0.011 0.166 0.221 0.112 0.111 0 0.102 0.054 0.151 0.Table 2.445 0.049 0.260 0.083 0.183 0.490 0.078 0.147 0.137 0.046 0.128 0.090 0.047 0.256 0. .413 0.021 0 0.205 0.252 0.226 0.043 0 0.453 0.090 $30-50K 0.238 0.064 0.088 0.019 0.054 $100K-250K 0.101 0.645 0.158 0.162 0.127 0.004 0.061 0.630 0.559 0.149 0.489 0.027 0.051 0.064 0.047 0.092 0.080 0.4: Mean Asset Shares.031 0.181 0.122 0.073 $250-1000K 0.199 0.061 0.454 0.007 0.068 0.087 0.041 0.062 Above $100K 0.056 0.039 0 0.097 0.086 0.046 0 0 0 0 0 0.022 0.129 Wealth Below $50K 0.730 0.075 Age Under 35 0.048 50-64 0.072 0.132 0.436 RESTATE HO RR 0.040 0.091 0.172 0.062 0.059 0.055 0.415 0.083 0.010 0.608 0.759 0.047 0.389 0.078 0.281 0.143 0.065 0.111 0.251 0.107 0.014 0 0.069 0.018 0.541 0.112 0.068 0 0.234 0.287 0.082 Above 1000K 0.062 Above 65 0.401 0.091 0.049 0.165 0.089 0.049 0.028 0.025 0.047 0.157 0.052 0 0.535 0.201 0.
045 0.038 0.087 0. RETIRE.560 0. 1998: Continued ACCOUNT STOCK RETIRE HOUSE VEHICLE HO RR HO RR HO RR HO RR HO RR RESTATE HO RR 0.070 0.049 0.110 0.069 0.495 0.061 0.032 0. 2) All dollar values are reported in 1998 dollars. HOUSE.055 0.098 0.195 0.044 0.044 0.512 Children CHILD0 CHILD1 CHILD2 CHILD3 37 Source: Survey of Consumer Finances.200 0.085 0.019 0.577 0. STOCK.048 0.062 0.288 0.609 0. VEHICLE.087 0.074 0.117 0.089 0.653 0 0 0 0 0.040 0.098 0. The text deﬁnes the assets called ACCOUNT.222 0.044 0. Notes: 1) Tabulations are weighted using sample weights.038 0.040 0. .Table 2. 1998.471 0. and RESTATE.026 0. 3) HO represents homeowners and RR represents renters.5: Mean Asset Shares.102 0.115 0.088 0.373 0.122 0.052 0.
2) Variables are deﬁned in Appendix A.000 MTR RISKY WHITE YEAR92 YEAR95 YEAR98 Notes: 1) ** indicates signiﬁcance at 1 percent level.747 0.029 -0.143 0.080 0.000 0.287 0.044 ** 0.004 ** 0.052 ** 0.034 ** 0.040 -0.Table 2.030 0.030 ** 0.014 -0.102 -0. The number of observations N=13.050 CONSTANT AGE AGE2 /100 MARRIED FEMALE CHILD1 CHILD2 CHILD3 CHAGE13 INCOME/10.010 2.052 0.063 0.174 0.579.041 * -0. and * indicates signiﬁcance at 5 percent level.2.005 ** 0.042 ** 0.6: Results from Probit Estimation HOMEOWN Coeﬃcient Standard Errors Marginal Eﬀects -4.040 ** -0.053 0.085 0.304 0.261 0.046 0.049 ** 0.047 ** 0.096 0.341 0.108 0.007 0.137 0. 38 .153 ** 0.118 0.404 0.210 0.005 ** 0.193 0.137 ** 0.072 0.
006 -0.002 -0. .031 * STOCK Coef SE -0.023 0.003 0.006 -0.005 -0.021 0.022 0.010 ** * ** continued on the next page.002 -0.004 0.056 0.198 0.006 ** FEMALE 0.002 0.016 0.092 0.019 0.012 0.004 0.004 0.024 0.003 -0.008 0.026 0.002 0.001 0.004 ** MR:home -0.004 0.054 RETIRE Coef SE -0.Table 2.003 0.005 0.005 0.024 0.001 0.006 0.004 0.029 0.001 * MTR -0.007 0.009 0.002 0.001 0.087 0.059 0.003 ** YEAR92 -0.002 ** L ASSET 0.398 0.010 0.003 -0.020 0.007 -0.007 -0.006 -0.008 0.190 0.008 0.010 0.024 0.033 0.008 0.009 0.009 0.005 -0.001 -0.032 0.004 0.006 0.002 0.037 0.002 -0.006 * CHILD2 -0.002 -0.018 ** MR:+ wealth -0.001 0.039 VEHICLE Coef SE 0.007 0.005 0.003 -0.063 0.115 0.063 0.004 0.009 -0.006 0.021 0.006 ** CHILD3 -0.021 0.003 0.027 0.001 0.008 -0.013 0.003 -0.005 CHILD1 -0.020 -0.307 0.061 0.010 0.003 0.001 0.089 0.056 0.010 0.027 0.000 0.003 0.054 ** AGE -0.004 0.007 -0.005 0.011 0.012 0.125 0.7: Results: Asset Shares and Housing Expenditure of Homeowners ** ** ** ** ** ** ** ** 39 ** ** ** ** * * ** ** ** ** ** ** ** ** ** ** ** * ** ** ** * ** ** ** ** ** ** ** ** ** ** ** ** ** * ** ACCOUNT Coef SE CONSTANT 0.003 ** YEAR95 -0.006 0.011 -0.016 0.001 0.455 0.005 0.005 0.002 0.001 ** MARRIED -0.002 0.003 0.007 -0.007 0.027 0.031 0.026 0.006 L INCOME -0.008 0.049 0.021 0.432 0.003 -0.515 0.049 HOUSE Coef SE 1.006 0.003 ** YEAR98 -0.006 -0.008 0.021 0.010 0.023 0.029 0.077 0.008 0.009 0.006 0.001 -0.006 -0.020 0.003 -0.063 0.009 0.006 0.007 -0.007 0.013 0.013 0.069 -0.062 0.023 0.018 ** RISKY -0.007 0.067 0.001 -0.013 0.112 0.005 0.001 0.007 ** CHAGE13 -0.007 0.001 ** AGE2 /100 0.000 0.004 -0.020 -0.
017 0.116 0.005 ** MR:home -0.001 -0.018 -0. 2) The text deﬁnes the assets called ACCOUNT.204 0.119 0.005 * YEAR95 0.001 0.032 0. STOCK. MR represents Mills Ratio.393 -0.003 0.025 ** RISKY -0.004 0.006 -0.307 0.024 0. RETIRE.001 0.094 0.004 -0.503 0.012 0.004 0.025 0.008 CHILD2 -0.007 0.002. The number of observations N=10.015 0.007 * L INCOME -0.008 0.008 0.009 FEMALE -0.010 0.010 0.036 0.005 YEAR92 0. . HOUSE.024 0.006 0.004 0.080 ** AGE 0.023 0.005 -0.568 0.002 -0.004 -0.002 0.008 0. All variables are deﬁned in Appendix A. and OTHER.004 -0.011 ** 0.043 0.189 0.002 ** MTR -0.017 0.000 0.002 0.008 ** CHILD3 -0.010 0.005 -0.068 0.036 Notes: 1) ** indicates signiﬁcance at 1 percent level.025 0.017 0.019 0.005 -0.025 0.002 0.015 0.001 ** MARRIED -0.246 0.584 0.002 0.004 -0.009 ** CHILD1 -0.003 -0.001 0.220 0.005 YEAR98 -0.004 0. RESTATE.004 0.023 0.177 0.066 0.2.025 MR: + wealth 0.181 0.014 0. VEHICLE.202 0.Table 2.8: Homeowners: Continued ** ** ** ** ** ** ** ** ** 40 log Eh Coef SE * -0.003 ** L ASSET 0.018 0.234 0.002 ** 2 AGE /100 -0.158 0.015 -0.018 0.001 0.004 0.008 CHAGE13 0. and * indicates signiﬁcance at 5 percent level.053 OTHER Coef SE -0.025 -0.003 0.007 ** * * 1.001 0.120 ** ** ** ** ** RESTATE Coef SE CONSTANT -0.049 -0.052 0.021 0.
010 0.019 0.059 0.002 0.204 0.054 0.001 0.014 0.001 0.027 0.025 0.000 0.006 -0.015 0.011 0.012 0.026 -0.034 0.012 YEAR92 -0.109 0.014 0.014 MR:home -0.015 0.026 -0.027 0.014 YEAR95 -0.017 0.173 AGE -0.032 0.023 0.021 0.002 ** MARRIED -0.021 ** CHAGE13 -0.011 ** 0.005 0.003 0.072 0.001 -0.019 0.005 0.064 ** 0.097 -0.001 0.008 0.005 0.018 0.243 -0.319 0.089 0.013 0.014 0.015 -0.029 0.003 0.001 0.019 0.243 0.079 * RISKY 0.052 0.080 0.079 0.007 0.035 0.013 0.020 -0.014 0.002 ** -0.154 ** 0.002 0.024 0.059 0.017 CHILD2 -0.029 0.015 -0.003 0.033 0.031 0.019 ** CHILD3 -0.038 * MR:+ wealth 0.070 0.007 0.035 VEHICLE Coef SE 2.014 ** L ASSET -0.381 0.086 0.004 -0.120 0.022 L INCOME 0.130 0.016 0.017 0.010 0.039 STOCK Coef SE -0.038 0.014 0. .050 0.021 ** FEMALE 0.022 0.011 -0.004 0.Table 2.013 * CHILD1 -0.004 0.028 0.9: Results: Asset Shares and Housing Expenditure of Renters ** ** ** ** ** ** ** * ** ** ** ** ** ** * ** ** ** 41 ACCOUNT Coef SE CONSTANT 0.015 0.006 0.014 ** 0.003 ** AGE2 /100 0.010 0.009 0.285 0.017 0.048 -0.051 0.103 -0.001 0.015 0.023 0.039 0.074 0.019 0.068 0.011 0.002 ** 0.004 ** MTR 0.793 0.030 0.077 0.007 0.008 -0.061 0.015 * YEAR98 0.026 0.012 0.008 -0.019 0.008 0.053 ** continued on the next page.020 0.019 -0.033 0.010 0.037 RETIRE Coef SE ** -0.000 0.018 0.
073 * ** ** ** OTHER Coef SE 0.014 0.010 * YEAR98 -0.173 0.012 0.069 0.038 0.027 0.001 0.125 -0.001 0.017 0.009 YEAR92 -0.118 0.020 0.030 0.036 0.010 L INCOME 0.008 RISKY 0.011 -0.002 0. The number of observations N=3.014 -0.109 0.033 ** MR: + wealth -0.003 ** L ASSET -0.061 0.014 -0.011 0.002 -0.014 0.010 0.005 0.030 0.189 0.018 0.014 -0.001 0.054 MTR -0.004 0.016 0.580 0.Table 2. 2) The text deﬁnes the assets called ACCOUNT.030 0.001 0.011 0.005 0.004 0.002 * MARRIED 0.009 * YEAR95 -0.020 0.002 2 AGE /100 -0.044 0.014 -0.020 0.035 -0.042 0. . STOCK.045 0.035 0.334 0.024 MR: home 0.012 CHILD3 -0.004 0.006 ** ** RESTATE Coef SE CONSTANT -0.2.067 0.001 0.020 -0.010 CHILD1 0.017 0. HOUSE.315 0.011 CHILD2 -0.038 0.10: Renters: Continued ** ** 42 log Eh Coef SE 4.073 ** 0.017 0.038 0.000 0.130 * AGE 0.005 ** -0. and OTHER. RESTATE.083 0.365 -0.022 0.001 0.062 0.004 0.022 0. MR represents Mills Ratio.003 -0.021 0.012 0.007 0.033 -0.014 0.285 -0. All variables are deﬁned in Appendix A.032 0.005 0.365 0.064 0.003 -0.004 -0.037 0.014 CHAGE13 -0.110 0.038 ** Notes: 1) ** indicates signiﬁcance at 1 percent level and * indicates signiﬁcance at 5 percent level. RETIRE.577. VEHICLE.030 0.029 0.015 FEMALE -0.102 0.
101 0.132 0.086 0.095 0.030 CHILD2 CHILD3 0.033 0.049 0.043 0.099 0.057 0.577 0.090 0.043 0.079 0.114 0.088 0.044 0.650 0.102 0. and RESTATE.049 0.120 0.093 0.096 0.047 0.602 0.089 0.611 0. VEHICLE.552 0.626 0.103 0.607 0.594 0. 43 .111 0.063 0.642 0.094 0.043 0.141 0.11: Portfolio Shares for Assets by the Number of Children and Age CHILD0 AGE=30 ACCOUNT STOCK RETIRE HOUSE VEHICLE RESTATE AGE=40 ACCOUNT STOCK RETIRE HOUSE VEHICLE RESTATE AGE=50 ACCOUNT STOCK RETIRE HOUSE VEHICLE RESTATE 0.061 0.037 0.105 0.036 0.064 0.058 0.054 0. HOUSE.040 0. STOCK.047 0.036 0.058 0.056 0.122 0.038 0.053 0.044 0.Table 2.100 0.043 CHILD1 0.056 0.023 0.038 0.053 Notes: The text deﬁnes the assets called ACCOUNT.055 0.534 0. RETIRE.590 0.048 0.128 0.047 0.070 0.064 0.112 0.049 0.055 0.617 0.
44 . Hubbard et al. however. Kimball . Skinner .2 For example. empirical work on the strength of precautionary saving has provided mixed evidence.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. the standard life-cycle model suggests that households smooth consumption and spread resources across periods of high and low income. consumption proﬁles over age are hump-shaped.Chapter 3 The Eﬀect of Precautionary Motives on Household Saving and Fertility 3.1 Introduction Many recent studies have recognized the role of precautionary motives on household saving behavior. Deaton  and Browning and Lusardi  give a list of empirical puzzles. these models are able to explain some of the empirical consumption puzzles.  and Carroll . Carroll  shows that this kind of consumption proﬁle is consistent with a precautionary saving model in which individuals face uncertainty about their future earnings. As an extension to the traditional life-cycle model. In many household-level data sets. Dynan  and Starr-McCluer  ﬁnd lit1 2 See Zeldes . Yet. tracking the ageearnings proﬁle.
and incorporating the restrictions of the theoretical model. 3 45 . ﬁnding an appropriate instrument.tle or no evidence for precautionary motive. See Browning and Lusardi  and Carroll et al. It seems reasonable that these motives are aﬀected by the presence of children. household income or the age of the head might aﬀect household saving and fertility simultaneously. Yet the causal eﬀect might go in the opposite direction. the precautionary motive includes saving to protect the well-being of children against income ﬂuctuations. ignoring the eﬀect of uncertainty on household composition. Furthermore. and bequest motives. this chapter extends the empirical work on precautionary saving. whereas Carroll and Samwick . For example.  and Lusardi  ﬁnd more support for the precautionary motive. that is. and. precautionary motives. ﬁnally. the bequest motive includes saving to leave assets to children.  suggest that the mixed results might be due to the diﬃculties in empirically testing for precautionary saving. fertility might be aﬀected by uncertainty or income ﬂuctuations. given precautionary and other motives. Browning and Lusardi  and Carroll et al. By examining the implications of uncertainty on the fertility decisions of households and incorporating fertility decisions into household saving decisions. the life-cycle motive includes saving for children’s education.3 One problem that has not been mentioned in the literature is that all of these empirical models try to explain the eﬀect of income uncertainty on household savings.  for the details. This chapter takes account of the fact that children are endogenous along with the The problems include proxying certainty. Most of a household’s saving motives can be grouped into one of three categories: life-cycle motives.
respectively. The proportion of households citing saving for children’s educational expenses and home purchase were 5. Wolpin  estimates a dynamic stochastic model of fertility within 4 See Hotz et al.  for a survey of life-cycle fertility models. the eﬀect of income uncertainty on fertility over the life-cycle.7 and 4. Most life-cycle fertility models incorporate some types of uncertainty.saving behavior when estimating the eﬀect of children on savings.3). When disaggregated into age groups. buying a home and education of childrenas the most important reasons for saving in the 1983 SCF (data come from the panel of 1983-89 SCF and is discussed at length in section 3. This chapter also addresses a neglected topic in the childbearing literature. The most frequently reported reason for saving was to increase resources for ‘rainy days’ such as unemployment and unexpected needs. The second most frequent reason was saving for retirement. Table 3. retirement. with 18 percent. saving for retirement peaking between age 51 and 60. all of the four reasons reveal a hump shape: saving for ‘rainy days’ peaking in the 41-50 age group. saving for a home purchase peaking below age 31. and saving for the education of children peaking between age 31-40. More than 32 percent reported that ‘rainy days’ were an important motivation for saving. This suggests that the relative importance of saving for each motive depends highly on the composition and the life-cycle stage of the household. namely.1 percent. 46 .4 For example.1 presents the proportion of households citing the following motives -‘rainy’ days.
5 Hotz and Miller  integrate the life cycle fertility and labor supply. even after controlling for the fact that saving is endogenous to the fertility behavior. and transitory shocks to the wife’s wage. this chapter can be viewed as a combination of those two prior works. Dunn  ﬁnds consumers respond to increases in the unemployment risk by postponing purchases of a home or a vehicle. 6 Becker  suggests that children can be viewed as durable goods yielding psychic income to the parents. None of these studies. there is evidence that income uncertainty has a direct eﬀect on fertility and family size. 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. however. have speciﬁcally analyzed whether uncertainty about earnings is a signiﬁcant factor on the choice of whether or not to have a child. Thus. I ﬁnd that households with higher income uncertainty are less likely to have a child. 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. In a study that addresses whether unemployment risk is an important factor in the timing of the purchase decision of durable goods.) 5 47 . the time path of the husband’s income. and consider a number of uncertainties such as the outcome of the contraceptive eﬀort. and does not aﬀect savings of the rest of the population. Using the data from the panel of 1983-89 SCF. However. 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.6 This chapter examines whether income uncertainty is associated with lower fertility and higher savings.an environment where infant survival is uncertain. and thus the variance of income does not appear in the decision function.
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
where ∗ ∆CHILDit = 1 if ∆CHILDit > 0 = 0 otherwise. 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). income and characteristics in 1983 and 1989. The 1983 SCF interviewed a 51 . liabilities. Maddala  shows that the resulting estimates of the coeﬃcients are consistent.3 Data The data set used for estimation is the 1983 and 1989 panel of the SCF. Note that the model is identiﬁed even if u1it and u2it are not independent s c and Xit includes all the variables in Xit . If consumers react to increases in uncertainty by cutting down their consumption. as suggested by the precautionary saving model. Then I estimate the equation (3. and u2it is an error term representing unobservable variables. η1 and η2 are parameters to be estimated. then they should also reduce their ‘consumption’ of children. 3.2) by OLS for all of the sample after substituting γ2 for γ2 for the fecund population ˆ and 0 for the other households. This data set contains detailed information on household assets. where η0 . First. and η1 should be negative. The model is estimated using a two- stage estimation procedure described in Maddala . This implies that households with higher income variability are less likely to have a child.
497 of them were reinterviewed in 1989. Total liabilities include mortgage debt. and this amount is divided by six to get the annual household saving. includes capital gains. This information could be used to exclude both realized and unrealized capital gains. bonds. substantial inconsistencies are observed between reported net investments in assets and measured changes in holdings. trusts. other loans for property. and 361 of them were reinterviewed in 1989. mutual funds. Net worth (NWORTH) is the total value of household’s assets minus its total liabilities. 103 households and 1. which will be called SAVE1. loans.7 Household saving is derived as a ﬁrst diﬀerence in net worth between 1983-89. See Kennickell and Starr-McCluer  for a general description of the 1983-89 panel. business equity. stocks. In addition to a standard multi-stage area probability sample. However. credit card debt. Keogh accounts. The 1989 SCF also asked households to report major changes in asset holdings since 1983. 7 52 . which makes it diﬃcult to distinguish between active and passive saving. saving accounts. call accounts. An oversample of 438 high-income households came from this list in 1983. The 1983 SCF consists of a dual sample. a list sample was drawn from tax information provided by International Revenue Service. where the ﬁrst includes liquid assets (checking assets. automobile loans. individual retirement accounts. certiﬁcates of deposit and saving accounts). other real estate. vehicles and other real assets like art and precious metals. home equity. The ﬁrst saving measure. cash value of life insurance and the later includes residential property. Total assets is the sum of ﬁnancial assets and nonﬁnancial assets. money market deposit accounts.sample of 4. balances outstanding on lines of credit and loans on consumer durables.
The precautionary saving model predicts that income risk regarding capital income might have a diﬀerent eﬀect 53 . 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.8 Income values for 1982. All values are converted to 1989 dollars using the Consumer Price Index Research Series Using Current Methods(CPI-U-RS). household demographic variables and age-interaction terms. ‘In [the preceding calendar year] how much was the total income you (and your family living here) received from all sources. and 1985 are drawn from the 1986 wave of SCF which was conducted with a large subset of 1983 respondents using a shorter questionnaire. 2. 1987 and 1988 are drawn from the 1983-1989 panel. The income measure comes from the question. I kept the value of the primary residence constant. Using the panel dimension of income observations in the data. before taxes and other deductions were made?’ Income of the households for 1983. 9 The income measure includes both capital and non-capital income. 8 9 Income uncertainty at- Of the 4. To remove the predictable component of income growth. 822 were reinterviewed in 1986 using a shorter questionnaire. I deﬁne two measures of income uncertainty. education. 103 households in the 1983 SCF. 1986. To exclude the capital gains. dummies representing asset holdings in 1983. The ﬁrst measure assumes that households have knowledge about their future income and expect their income to change over time as household characteristics change. 1984. year dummies.The inconsistency seems to be lower for home purchases (Kennickell and StarrMcCluer ). I regress log income on age.
However. In addition.10 Household permanent income (PERINC) is deﬁned as the mean of predicted income over the seven year period. Unfortunately. 1986 and 1989. The empirical results hold true for this measure too. ﬁnding an appropriate instrument on household saving behavior than that of earnings. this information is only available for 1983. households probably expect their income to change over time and know when some of these changes will happen. variability measures like VLI and VRLI might be poor proxies for uncertainty. 10 Female labor supply decisions are correlated with household fertility decisions. The second measure of uncertainty is the variance of log income for the 1982-89 period (VLI). which is not reported in this chapter. 11 Another income variability measure. 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.11 This measure assumes households have no information to forecast future income aside from their current income. is the coefﬁcient of variation of log income. Most studies use instrumental variables for the uncertainty proxy using information on occupation. 54 . using instrumental variable estimators is not useful when the ﬁrst stage instruments are poor. Therefore. Not excluding such expected changes biases this VLI measure of uncertainty upward. However. while transitory income (TRANSINC) is the mean of residuals from the earnings equation. As pointed out in Lusardi  and Browning and Lusardi .tributed to each household is equal to the variance of residual log income (VRLI) for the 1982-88 period. The mean of the reported income over the 1982-88 period (MEANINC) is also used as another measure of income. education and industry. Dummies representing the amount of assets that households hold by 1983 are included in the regression to control for this eﬀect. I control for the employment status of the spouses and female heads in the earnings regression.
households that experienced a change in composition such as marriage. The sample selection criteria for the sample are as follows. I use VRL and VRLI without an instrumental variable estimator.) This eliminates the income variability or net worth change caused by family separation or family creation.to exclude for identiﬁcation is problematic.180 households. 000. 299 households out of 1. 035 households with the heads between the age of 22 and 88 in 1983.13 Table 3.e. The variable ∆CHILD indiThe cut-oﬀ net worth of $10 million and saving of $600. those households with more than three missing or non-positive income values are dropped. 84 were dropped because of outlying net worth or saving values and 66 were dropped because of missing income values. this exclusion or a similar one is necessary when working with means which are aﬀected by outliers. divorce. A household is only included in the analysis if it remained intact between 1983 and 1989 (i.479 experienced a major change in family composition and were dropped from the sample. The ﬁnal sample consists of 1. See Kennickell and Starr-McCluer  for details. separation or the death of either head or spouse are excluded. All variables are described in detail in Appendix B. 000 is somewhat arbitrary. However. I also exclude those households with net worth greater than $10 million in 1983 or 1989 or for whom the absolute value of the change in net worth per year is more than $600. 13 The sample design in 1983 speciﬁcally excluded households with the heads under the age of 22. 12 55 .12 To calculate an accurate measure of income uncertainty. Of the remaining 1.2 illustrates the composition of the sample in detail.. In the panel 1983-89 SCF.1. Therefore.
Columns (3) and (4) of Table 3..6 percent of the fecund households had a child between 1983 and 1989. and saved more compared to the other households in the sample.cates the fertility of the household between 1983 and 1989. but had higher income between 1983 and 1989. 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.with and without an additional child . Most of the diﬀerences in net worth and saving between the two groups can be attributed to the fact that these two groups are at diﬀerent stages of their life cycles. According to the SCF data.0 percent had three. 18. comparisons across the two groups of households . Fecund households are headed by younger persons.611 in 1983. Also. respectively. mostly married (89.3 percent of the families experienced more than one birth during that time period-2.1 percent).2 provides the variable means by household fertility of the fecund households. ∆CHILD = 1 if the household experienced at least one birth of a child. Among fecund households.179 less than the mean net worth of the rest of the fecund houseOnly 3. Columns (1) and (2) provide the variable means and standard deviations of all of the households in the sample and the fecund households. Therefore.14 I refer to the households that had a child as households with an additional child. had less net worth in 1983.e. which is $37. fecund households are faced with higher income uncertainty than the rest of the sample. have higher expected income and have a higher number of young (0-6 years old) children in 1983. The average net worth for households with an additional child is $82.are plausible: households with an additional child are younger. i. 14 56 .
Households in the bottom 25 and top 10 percent of the SAVE2 distribution face higher income variability than the rest of sample. the increase is insigniﬁcant. 648 and $6. The measures of income uncertainty by household characteristics are given in Table 3. 000. respectively. while fecund households without an additional child saved $7.191). On the other hand.132 versus 0. 462. from 67. 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.8 percent in 1989. This suggests that households at the tails of the income distribution face higher uncertainty. Also.7 percent in 1983 and rose to 77.0 percent in 1983 to 72. 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.3. When households are grouped by SAVE1.5 in 1989. when we compare the income uncertainty of the two groups. we observe that households who had a child are faced with lower income uncertainty (0. 000 and above $60. The homeownership proportion among households with an additional child was 53. Uncertainty estimates are greater for households with mean income below $10. households with an additional child saved more than the rest of the fecund sample.holds. The homeownership proportion for the rest of the fecund sample is higher in 1983 but compared to the households with an additional child. 170 and $8. 690. the bottom 25 percent of the distribution faces a lower income variability than the households in the 25-50 percent of 57 . According to SAVE1 and SAVE2.
The dependent variable is ∆CHILD = 1 if the household had a child between 1983-89. Almost 36 percent of the households with heads below age 31 in 1983 had a child during the following six year period. Households that had a child save more. The right-hand variables include factors that are expected to aﬀect the demand for a child. regardless of how savings were measured. Diﬀerence between the savings of households with and without an additional child increase as the age of the household head increases.4 Estimation and Results Table 3. and 1 percent among the age 40 and above group. For other SAVE1 groups. Households who had a child between 1983-89 are diﬀerent from other households in terms of their saving. income and income variability. versus 16 percent of the households with heads between age 31-40. households with young and middle age heads that had a child face lower income variability. Table 3.the SAVE1 distribution. 58 . the estimates of income uncertainty decrease as the number of children living in household in 1983 increases.4 represents household saving. regardless of the uncertainty measure. When grouped according to the number of children.5 shows the results of the probit analysis of the fertility de- cision of the fecund sample. Considering the income uncertainty. for whom it reaches its highest value. income uncertainty is lower except the top 10 percent of the distribution. 0 otherwise. income and income uncertainty by childbearing decisions and the age of the household head. 3. and their permanent income is higher.
number of adults living in the household (NADULT). age (AGE). whereas older households with small children are more likely to experience another birth. a household income measure (MEANINC. indicating that being one year older reduces the probability of having another child by 1 percent. a 0. middle (MIDDCH) and older (HIGHSCH) children in 1983 and the interaction terms for age (AGE83×HOWN83 and AGE×YOUNGCH). a dummy indicating whether spouse works full time at paid employment in 1983 (SPFULLT). column (2) uses VLI and mean income and ﬁnally. The results in table 3.namely. an income risk measure (VRLI and VLI). homeownership in 1983 (HOWN83). respectively.6 percent. column (3) uses VRLI and mean income. The coeﬃcient of age is highly signiﬁcant and negative. number of young (YOUNGCH). Evaluated at the sample mean values.5 and 0. The analysis in column (1) uses VRLI as the income uncertainty measure and permanent and transitory income as the income measures.1 increase in VRLI and VRL decreases the probability of having a child by 0. race of the household head (WHITE). the probability of having another child declines with income variability (regardless of the measure) and the number of children in each age group living in the household. PERMINC and TRANSINC). marital status (MARRIED).5 show that other things being equal. 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. The signs of the age interaction terms imply that older homeowners are less likely to have a child. A married household is 8 to 10 percent more 59 .
the probability of having a child seems to increase with income. the behavior of the wealthy and the not wealthy are diﬀerent than the rest of the population. The predicted probability of having a child. TRANSINC and MEANINC). the income uncertainty interaction terms show whether or not .6 and 3. a measure of income uncertainty (VRLI and VRL). age interaction terms (AGE×NCHILD and age×∆CHILD) and income uncertainty interaction terms (VRLI (VRL)×NWORTH25 and VRLI (VRL)×NWORTH90). Similarly. age of the head (AGE). 60 . income (PERMINC. the number of adults and children living in the household (NADULT and NCHILD). a self-described expectation to leave a bequest (BEQUEST83). 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.7 for SAVE1 and SAVE2. However. namely. the change in the number of adults between 1983-1989 (∆NADULT). Estimates of the saving equations are presented in tables 3. both permanent income and mean income in columns (1) and (2) are signiﬁcant. in terms of the eﬀect of uncertainty. a dummy indicating having 1983 net worth in the top 10 percent and bottom 25 percent (NWORTH90 and NWORTH25).6 and 3. Finally.7 use the same income and uncertainty measures as columns (1)-(3) in table 3. Columns (1)-(3) in tables 3.likely to have another child.5. compared to households headed by an unmarried person. ∆CHILD. transitory income in column (1) has a negative eﬀect and mean income in column (3) is insigniﬁcant. is included as a right-hand variable with other factors that might aﬀect the saving behavior.
let us look at the eﬀect of the number of adults living in the household. which is 0. households in the top 10 percent of the wealth distribution save almost $11. Saving also increases with income.34. Changes in the number of adults between 1983 61 .447.6. However. Both SAVE1 and SAVE2 reduce with the number of adults living in the household. The results in Table 3.7).6 show that households in the top 10 percent of the wealth distribution and with VRLI of 0. around $7.The results for two measures of savings are quite similar (SAVE1 in Table 3.7 do not the support the idea that households save a higher fraction of transitory income. The estimated coeﬃcient of the propensity to save out of transitory income is 0. Before we examine the eﬀect of children on savings.500 less than the rest of the population as a result of an increase in income uncertainty. and it is signiﬁcantly lower than the estimated propensity to save out of permanent income. For example. the results in Table 3. Having 1983 net worth in the top 10 percent is associated with higher levels of SAVE1 and SAVE2 in all speciﬁcations. respectively.500 less than the rest of the population whereas households in the bottom 25 percent of the wealth distribution save $3.162 save about $15.6 and Table 3.6 and SAVE 2 in Table 3. which is 0. evaluated at the sample average of VRLI. 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.132-$8.162.24 in column (1) of Table 3.000 more than the rest of the sample. regardless of the measure.
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. however. 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. Households with children save less when the household head is below age 35 and save more above that age. That is another impact of children on household savings. The same is true for the number of children living in the household.796 more) than household that do not expect to leave a bequest. Having an additional child reduces savings. For this. however being one year older and having an additional child increases savings. Also. the sample is restricted to only fecund households.555-$12. Controlling for the number of children already living in the household. we observe that the eﬀects of the children and age interaction terms decrease but do not disappear.6 and 3.and 1989. households expecting to leave a bequest save signiﬁcantly more (around $12. and the fertility decision is modeled as an endoge- 62 . When we control for permanent income as in column (1) of Tables 3.7. do not aﬀect SAVE1 but appear to reduce SAVE2. This result highlights the importance of the interaction between household composition and the age of the household head. age does not aﬀect the savings behavior of those without children.
The results show that households would have saved around $2. 3. The empirical results suggest that income uncertainty directly aﬀects the probability of having a child.6. changes in the number of children and children already living in the household reveal a signiﬁcant eﬀect on household savings. This ﬁnding suggests that the overall eﬀect of children on household saving is negative.15 The results are given in Table 3.5 Conclusion This chapter estimates the eﬀect of the precautionary motive on house- hold fertility and savings by relating income uncertainty to the changes in the number of children and household net worth.297-4.8.133 according to the results of the three regressions in Tables 3. implying that younger households save less whereas older 15 See Maddala  for the models with self-selectivity. 63 .695-13. depends on the age of the household head. average SAVE1 of the households that did not have a child is around $12. even after controlling for several demographic characteristics. The direction of the response.nous switching model. I take into account the fact that fertility decisions are endogenous to household saving decisions. Finally. however. Overall. 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.066 less if they had chosen to have a child. In estimating this eﬀect.
households save more with an increase in the number of children. The main ﬁnding of this chapter is consistent with the life-cycle theory of saving and consumption. the age eﬀect on savings disappears. After controlling for the number of children living in the household and the expectation of leaving a bequest. the ﬁndings are not consistent with the predictions of the precautionary saving model that agents faced with uncertainty about future income increase their savings. At the same time. 64 . Household composition is an important factor of life-cycle savings.
273 0.000 Source: Survey of Consumer Finances.345 0.052 0. 1983 All By Age Below 31 31-40 41-50 51-60 61-70 70 and over Rainy Days Retirement Home 0.383 0.362 0. 65 .192 0.S.326 0. Notes: The table reports the proportion of households citing the selected motives as the most important reason for saving as ‘rainy days’.250 0.017 0.111 0.010 0.117 0.047 0.011 0. buying home and education of children respectively.047 0.000 0.176 0.004 0. population as a whole.122 0.289 0.323 0.230 0. Observations are weighted to reﬂect the U.057 0.041 Children 0.1: Saving Motives by Age Groups. 1983-1989. retirement.016 0. Number of observations: 1035.065 0.Table 3.206 0.
8 12.407 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 45.767 1.186 2.938 0.891 0.4 13. All variables are described in Appendix B.120 0.556 0.4 0.Table 3.460 0.169 Fecund HH ∆CHILD = 0 8282 7648 6868 6462 43109 44122 40171 39921 112861 119790 36.747 0.624 0.788 0.6 13.135 0.112 2.1 0.1 12.180 0.246 0.055 0. Observations are weighted using the sample weights. All dollar values are in 1989 dollars.652 0.092 2.795 0.334 0.189 38.645 0.289 0.7 0.725 0.791 1.780 0.001 0.424 0.297 0.191 0.516 2.302 0.672 0.151 N 1035 509 422 87 Note: ∆CHILD=1 if the household had a child between 1983 and 1989 (0 otherwise). The table reports means of the variables.734 0.9 0.725 0.490 0.162 0.197 ∆CHILD = 1 11170 8690 38852 41210 82611 30.778 0.1.537 0.437 0.132 0.456 0. 66 .372 0.537 0.845 0.487 0.670 0.
6504) $10.1912 0.9087) NWORTH Below $10.3279) SAVE1 Below (-$1.2740) (0.1468 0.446 15.2117 (0.2657) Above $60.Table 3.1707 (0.056 25.2371) $1.726.1056 0.1 0.1 0.1363 (0.0 0.489 25.2013 0. and VLI is the variance of log income.1296 (0.0 0. VRLI is the variance of residual log income.1803 0. 67 .1794) Above $30.518-314.162 (0.5512) SAVE2 Below (-$739) 25.7 0.2825) (0.1194 (0.000-29.169 (0.0 0.0 0.265-52.1095 0.125 25.725 25.1330 0.1832 (0.2 0.1284 (0.3362 0.1479 (0.446 10.0 0.5245) 0.9431) (0.3524) (0.0 0.2738) (0.0 0.2 0.2713 (0.10.1462 (0.6357) (0.5066) 1 Child 17.2269) (0.490-7.0 0.0 0.0 0.2171) 2 and more 27.1088 (0.818 10.1.3: Mean Income Uncertainty by Household Demographics % HH VRLI All 100 0.232 25.2086) Above $314.0902 (0.3333) (0.000-59.2973) Note: Standard deviations are given in parentheses.492 15.6786) (0.4092) (0.3234 (0.2579) $7.0 0.2449) (0.492 10.6129) (-$739)-1.1527 (0. All variables are deﬁned in Appendix B.2274) (-$1.0988 (0.4472) (0.1559 0.0 0.4963) 0.0 0.1312 (0.2458) 0.5537) $ 1.3980) Above $24.4881) (0.4940) (0.078)-1.000 12.1855 (0.265 25.2374 (0.1889 (0.1715 (0.3334) $52.4780) $ 10.057-30.2210) (0.2299 0.1027 0.3230) $127.1808) (0.1184 0.2281 (0.999 36.2391 (0.2290 0.999 37.2642) $30.1451 0.0998 0.2920 0.0977 (0.1716 (0.7517 25.2330 (0.1269 (0.5836) (0.126-24.433) 0.0 0.233-12.0 0.426) MEANINC Below $10.0 0.5530) NCHILD No Children 55.818 15.3376) VLI 0.1996) (0.078) 25. Observations are weighted using the sample weights (N=1305).7 0.2134 0.4232) $10.1436 0.000 14.
3 8.5 24.884 36.3064 0. 68 .487 0.8 10.1369 0.2376 VLI 0.272 9.390 52.628 0.331 23.1774 0.528 4.899 0.Table 3.1 4.4: Savings.0812 0.1727 3. All variables are deﬁned in Appendix B.619 3.812 6.1408 0.9 11.2920 6.1.769 0.477 40.049 5.636 27. and VLI is the variance of log income.1839 0.422 0.1507 20.220 34. VRLI is the variance of residual log income.0841 56.912 0.5 4. 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 12.2261 Note: ∆CHILD=1 if household had a child between 1983-1989 (0 otherwise).257 43.
0920] 1.0829] [-0.019** 0.714 NADULTS 0.31 0.543 0.063 0.14 0. Number of observations N=509.063 0.134 0. and HAGE is HOWN83×AGE.369 -0.178** 0.389 0.545 0.385** 0.068 YOUNGCH -1.208** 0.3340] [-0.0845] [-0.062 -160.208** 0.35 0.132** 0.0786] [-0.020** -0.Table 3.060 -2.027** 0.0625] -0.886** 0.060 -160. ** indicates signiﬁcance at 5 percent level.0426] -0.20 Pseudo R2 0.886** 0.175** 0.154** 0.565 1.0001] [ 0. .077 0.001 1.020** [-.3338] [-0.175** 0.229 -0. Marginal eﬀects are given in the brackets.1041] [-0.047 -0.001* [ 0.844 MIDDCH -0.409 0.0553] [-0.368 -0.00 0.232 HAGE -0.980 -0.228 WHITE -0.1038] [-0.1040] [-0.623** 0.024** 0.1297] [ 0.0001] [ 0.0594] 69 CONSTANT AGE VLRI VLI PERMINC/1000 0.000* 0.166** 0.0099] [-.154** 0.627** 0.024** 0.236 [-0.0675] -0.397 0.31 0.1037] [-0.0577] (3) Coef StdE 1.0550] [-0.0787] [-0.566 [-0.131 0.130** 0.186** [-.749** -0.225** [-.410 0.001 1. and * indicates signiﬁcance at 10 percent level.001** 0.021** -0.418 0.953** 0.0008] [-.768 0.024** Note: Coef reports coeﬃcients and StdE reports standard errors.627** 0.0541] -0.366 -0.001 MEANINC/1000 MARRIED 1.019** 0.073 SPFULLT -0.203** (1) Coef StdE 1.448 0.717* -0.420 YAGE 0.0613] 0.130 0.006 TRANSINC/1000 -0.0612] [0.2375] -2.047 [-0.5: Probit: Fertility Decision of Fecund Households (2) Coef StdE 1.998 -0.369 [-0.720* -0.0095] [-.225** 0.060 [-0.357 0.331 HIGHSCH -0.0844] [-0.392** 0.130** 0.0094] [-.049 Likelihood -152.564 HOWN83 2.384** 0. YAGE is YOUNGCH×AGE.000 0.
and * indicates signiﬁcance at 10 percent level. Number of observations=1.22 257 53 -7244 3908 -24818 11791 707 319 12952 5786 -7845 5112 .22 -21218 5702 ** -63955 26900 ** -131 306 -131 305 -185235 83042 ** -186203 83131 ** 6412 2952 ** 6474 2950 ** CONSTANT VRLI VRL NWORTH25 NWORTH90 VRLI× NWORTH25 VRLI× NWORTH90 VLI× NWORHT25 VLI× NWORHT90 AGE ∆CHILD AGE ×∆CHILD PERMINC TRANSINC/1000 MEANINC/1000 NADULTS NCHILD AGE× NCHILD BEQUEST83 ∆ NADULT R2 255 53 ** -7132 3916 ** -24479 11818 ** 698 319 ** 12916 5780 ** -7860 5120 * . ** indicates signiﬁcance at 5 percent level. .Table 3.6: Regressions of SAVE1 on Income Uncertainty with Endogenous Fertility Decision (1) Coef StdE 19212 19254 2250 2252 343 3520 26829 12463 ** -21824 6015 ** -71146 29321 ** 2180 2441 -500 3222 36903 11508 ** -464 3230 37290 11447 ** -22195 5914 ** -71517 28439 ** (2) Coef StdE 15228 19373 (3) Coef StdE 15240 19296 2258 2365 70 -208 294 -134139 93086 4256 3304 343 102 ** 240 59 ** -7554 3838 ** -22542 11934 * 646 320 ** 12654 5751 ** -7664 5177 .035.22 ** ** ** ** ** Note: Coef reports coeﬃcients and StdE reports standard errors.
** indicates signiﬁcance at 5 percent level.Table 3. and * indicates signiﬁcance at 10 percent level.18 223 57 -8264 3929 -24089 11699 686 319 11736 5772 -10074 5321 . Number of observations=1.18 Note: Coef reports coeﬃcients and StdE reports standard errors.035.7: 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 -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 * .
72 .Table 3.672 8.133 12.375 422 422 422 Notes: E(SAVE1|∆CHILD=0) denotes average SAVE1 of the households that did not have a child between 1983-1989 and E(SAVE1|∆CHILD=1) denotes average SAVE1 of the households had they chosen to have a child.154 10.695 12.8: The Eﬀect of a Change in the Fertility Decision on SAVE1 Fecund HH E(SAVE1|∆CHILD=0) E(SAVE1|∆CHILD=1) N (1) (2) (3) 13.527 10.
Gale and Scholz  estimate that the annual ﬂow of parental 73 .Chapter 4 Saving for Children’s College Education 4. and 80 percent reported using some current income. While the percentage was lower for those in the lower income group (income below $35.000).1 Introduction The purpose of this chapter is to analyze an important life-cycle saving motive: saving for children’s college education. for those in the higher income group (income above $70.000) it was 98 percent (Presley and Clery ). 65 percent of the parents contributed a positive amount to their children’s college costs as a gift. 90 percent of dependent undergraduate’s parents contributed to their children’s college costs. Understanding the eﬀect of ﬁnancing children’s college education on household saving behavior is important at least for three reasons. First. parents contribute a signiﬁcant amount to their children’s college costs. According to the 1996 National Postsecondary Student Aid Survey (NPSAS). Of those contributing to their children’s college costs. about 65 percent reported using some previous savings. Using the 1983-86 SCF. and the average amount of their support was about $3.900 (Choy and Henke ). According to the 1987 NPSAS.
Using alternate but also plausible assumptions. Long  ﬁnds that the eﬀect of the ﬁnancial aid tax on asset holdings is smaller than the eﬀect in the prior literature. Feldstein .5 billion. However. this chapter examines the eﬀect of anticipated educational expenses on household savings. as shown in Long .contributions totaled about $35 billion. Using the data on actual expenditures on children’s college education. According to their estimation. which is 12 percent of the aggregate net worth in 1983. Dick and Edlin  and Long  have recently examined the adverse eﬀect of the means-tested student aid process on household asset accumulation. Gale and Scholz  convert the ﬂow of college support to a stock of wealth using steady-state assumptions. 74 . the focus has been on calculating the ﬁnancial aid tax and measuring its negative impact on household asset accumulation. the ﬁnancial aid tax rate on capital income can be as high as 50 percent. Second. According to Edlin  and Feldstein . Edlin . 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. To date. the results in Edlin  and Feldstein  depend on a variety of assumptions such as the number of children enrolled in college. anticipated college costs and the amount of aid that is received and so on. contributions to children’s education yield a wealth of $1.441. families who save for college reduce their eligibility for ﬁnancial aid. The college ﬁnancial aid system imposes an implicit tax on the savings of households that are potentially eligible for ﬁnancial assistance.
 develop a model relating children’s schooling to family size. The results of his model conﬁrm that investments in children’s human capital. Steelman and Powell  investigate the relationship between the structure of the sibling group and parental ﬁnancial support for children’s college education. which are measured by children’s income and years of schooling. diﬀerent forms of parental expenditure such as children’s schooling. and test predictions of their model using the veterans sample of white male twins and the sample of their adult oﬀspring. they ﬁnd an inverse relationship between family size and children’s schooling. Tomes  empirically tests whether parental bequests of wealth and human capital investments represent substitute forms of parental transfer. they analyze the inﬂuence of size and ordinal position of siblings on the like- 75 . The estimates in Tomes  show that family size and children’s schooling are jointly determined. child care and bequests have been used as the qualitative measure. Speciﬁcally.Third. with and without equal access to ﬁnancing for education. the quality-quantity model of fertility behavior assumes that parents have preferences both for the expenditure per child and the number of children. are negatively related to subsequent levels of inheritance. Behrman et al. The analyses in Willis  and Becker and Lewis  show that parents with few children have substituted quality for quantity. 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. In the empirical investigation of this model. Without unequal access to schooling.
Steelman and Powell  argue that later-born children are more favored relative to earlier-born ones due to the family life cycle. education and so on. This chapter also uses the amount of parental expenditure on children’s college education as a measure of child quality.2 In addition. using Japanese household data. Parents have more resources when later-born children reach college age.2 percent of gross saving. A number of studies have analyzed motives for saving such as saving for retirement. The results of their analysis show that retirement and precautionary motives account for 25. emergencies. ordinal position alters parental support in favor of later-born children.lihood and amount of parental support. bequests.1 percent of gross saving. Moreover. Their ﬁndings also show that the importance of each saving motive depends on the age and the life-cycle stage of the household. respectively.7 and 28. It would be of interest to investigate this eﬀect on the level of parental support using the information on household savings. saving for ‘rainy days’ and saving for bequests and inter vivos transfers. an analysis of ﬁnancing college education and family size highlights an important aspect of the quality-quantity model. Saving for children’s education is the third most important saving motive after saving for retirement and ‘rainy days’ and accounts for 9. Horioka and Watanabe  analyze the amount of gross saving and dissaving for each of twelve motives including saving for retirement. Their results show that the number of siblings signiﬁcantly decreases both the likelihood and amount of parental contribution to children’s college education. 1 76 .1 Given the rapidly rising cost of college tuition. The data set used in the chapter does not provide information on the ordinal position of the child attending college. 2 See Browning and Lusardi  for a survey of the literature.
One exception is Souleles . saving for ‘rainy days. Souleles  examines consumption of households as they pay for the college expenses of their children.3 percent list retirement and 5. education of children. The sample includes households with nonretired heads and spouses (The SCF and restrictions on the sample are discussed in Section 4.3).Although saving for retirement.3 percent list education as the most important reason for saving.1 shows the percentage of households reporting that they cannot or do not save. and buying durable household goods. The SCF contains a question that asks the household’s most important reason for saving. taking vacations and so on.’ is the most cited reason. 15. While 35. ‘rainy days’ (emergencies and unemployment). Using the Consumer Expenditure Survey. income ﬂuctuations and bequests have motivated substantial research. buying a home and other reasons 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. Table 4. the motive of saving for children’s education has not been much investigated.5 percent of households list ‘rainy days’ as the most important reason for saving. 77 . The last column of Table 4. medical and dental expenses. Among the households saving for retirement. Other reasons for saving include saving for ordinary living expenses.’ home purchase and children’s education. The table provides the responses of the sample used in this chapter. ‘rainy days.1 shows the percentage of households in the 1983 survey citing retirement. His ﬁndings are consistent with the life-cycle theory of consumption and saving.
1 also shows the percentage of households citing each saving motive by the number of children and net worth in 1983. The percentage of households in the 25-75 percentile of the wealth distribution citing ‘rainy days’ as the most important saving motive is higher than the percentage of households in the lower and higher wealth groups. 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. As the number of children increases. Among the households in the higher wealth groups.’ retirement and other reasons show a systematic trend relative to the total number of children.8 percent). while only 2. the percentage of households saving for retirement increases with wealth.4 percent in the top 25 percentile report saving for retirement.The percentage of households saving for ‘rainy days. 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. Among the households in the bottom 25 percentile of the wealth distribution. Table 4. This table shows that the number of 78 . the eﬀect of the number of children on the percentage of households reporting saving for children’s education disappears. and the percentage of households citing retirement as the most important reason increases. For example. 5.7 percent of those in bottom 25 percentile of wealth distribution report saving for retirement.3 percent vs. Controlling for the number of children. the percentage of households citing ‘rainy days’ and other reasons as the most important reason decreases. among households with 1 or 2 children.
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.2 an79 . Further. and the amount of savings increases with the age of the household head. We continue to observe this eﬀect even after controlling for the household wealth. I also obtain predictions concerning the simultaneous determination of family size and college expenditures per child. The remainder of this chapter is organized as follows. In this chapter. 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. 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. a household with a 43 year old head expecting to have $2. Section 4. the eﬀect of anticipated educational expenses on household savings are estimated. The data from the 1983-86 SCF is used to estimate two equations in which the dependent variables are household savings and educational expenses. Using the actual college expenses reported in the SCF. Other things constant.children has a signiﬁcant eﬀect on saving motives. the empirical ﬁndings provide an answer to why saving is concentrated among wealthier households. Households with higher income and wealth expect to have higher educational expenses.000 in children’s college expenses saves $8. households save for their children’s college expenditures. Also. and they save in advance for these expenses.000 more than it would had it not expected to have any college expenses.
6. Section 4. Section 4.4 provides a framework for the empirical analysis of the interaction between savings and college expenditures. chooses to have n children. c2 . per capita college investment is assumed to be equal for all n children.3) (4. second-period consumption. Finally.1) . In the ﬁrst period. Section 4. n) subject to c1 = y1 − A c2 = y2 + (1 + r)A − πen 80 (4.5 estimates the determinants of college expenditures and uses these estimates to investigate the eﬀect of expected college expenditures on household savings. Parents choose ﬁrst-period consumption. and the number of children to maximize U = U (c1 . For simplicity. a summary and conclusions are presented in Section 4. a couple earns y1 .2) (4. the return on accumulated assets (1 + r)A and second period wage income y2 are divided between consumption c2 and paying for children’s college education e. e.alyzes a model of the quality-quantity interaction of fertility with household savings.2 A Model of Saving for College This section considers a world in which individuals (parents) live for two periods. In the second period.3 describes the 1983-86 SCF. and the family consumes together c1 and saves A to earn interest at the rate of r. investment to each child’s education. 4.
If the utility function is CES with equal elasticity of substitution between all arguments.8) where γ is the elasticity of substitution. y2 + (1 + r)A − πen. Ue is the marginal utility of children’s education. e. y2 + (1 + r)A − πen (4. n) (4. This expression implies that an increase in educational expenses decreases the second-period consumption relative to ﬁrst-period consumption.6) (4. Since the right-hand side is a constant. Substituting (4.7) where U1 and U2 are the marginal utility of consumption in the ﬁrst and second periods. and Un is the marginal utility of family size. The ﬁrst-order conditions are −U1 + (1 + r)U2 = 0 −πnU2 + Ue = 0 −πeU2 + Un = 0 (4. respectively.5) (4.5) can be written as follows: 1 y1 − A = (1 + r) γ−1 .where π is the price of education.4) where the three choice variables are accumulated assets (A).2) and (4. equation (4.3) into (4. which results in an increase in accumulated assets. educational expenses (e) and the number of children (n). 81 .1) yields the following unconstrained maximization problem: U = U (y1 − A. a decrease in second-period consumption is likely to decrease the ﬁrst-period consumption.
household saving can be associated with two diﬀerent saving motives: saving for uncertainty about future income (precautionary saving) and saving for children’s education. The empirical speciﬁcation of the model described below controls for precautionary saving while it estimates the eﬀect of educational expenses on household savings. This interdependence implies an inverse relationship between the number of children and educational expenses. 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. When uncertainty about future income is assumed. If the third derivative is positive.7).6) and (4. then U2 is a convex function. E1 [U2 ] exceeds U2 [E1 ]. 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. 3 82 . 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. In this case. let us assume that the second period wage income y2 is stochastic.3 The combination of a positive third derivative of the utility function and uncertainty about future income reduces consumption in the ﬁrst period.To extend the analysis to account for uncertainty.
4 83 . including those not living in the household. The college expenditure variable is the outlay of college education per child. This variable includes children of previous marriages living with former spouses. SAVE1. The fertility variable (CHILD) is the number of children of either the respondent or spouse. income and demographic characteristics.4 The college expenditure variable (COLLEXP) captures the quality dimension associated with the expenditure per child. In 1986. liabilities.822 of these households were reinterviewed.3 Data The empirical analysis uses data from the 1983-1986 SCF. The respondents were also asked how many years of college their children completed from 1983-85. In 1986. Unfortunately.4. 2. The 1983 survey contains interviews from a random sample of 3.824 households and a high-income supplement of 438 households. The SCF contains detailed information on household assets. Household savings are measured in two ways. savings and other control variables. 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. The variables used in the empirical analysis are classiﬁed into four groups: fertility. the data does not diﬀerentiate between children away in college or living on their own and with former spouses. The ﬁrst measure. I use the number of children attending college and the number of years they attended to normalize college expenditures. college expenditure.
call accounts.is the change in net worth between 1983 and 1986 divided by the number of years. home equity. other loans for property. race. business equity. reasons for borrowing and saving. credit card debt. cash value of life insurance and the later includes residential property. In order to exclude unrealized capital gains on the primary residence. bonds. 5 84 . and the demographic characteristics associated with tastes (urban residence. saving accounts. Total liabilities include mortgage debt. Other controls include variables that aﬀect savings. and the educational level of the spouse. Whenever a household did not buy or sell a house that was the family’s primary residence. Keogh accounts. mutual funds. a second measure of savings (SAVE2) is used. marital status. and whether or not the household head is willing to undertake risky investments). trusts. stocks. Net worth (NWORTH) is the total value of household’s assets minus its total liabilities. balances outstanding on lines of credit and loans on consumer durables. educational expenditures and fertility decisions. gender of the household head and other household characteristics. certiﬁcates of deposit and saving accounts). I estimate household permanent and transitory income. 1983. Transitory income (TRINC) Total assets is the sum of ﬁnancial assets and nonﬁnancial assets. Using the reported household income for 1982. where the ﬁrst includes liquid assets (checking assets. individual retirement accounts.5 SAVE1 includes the realized and unrealized capital gains. gender and the educational level of the household head. the value of the primary residence in 1983 is kept constant. Household permanent income (PERINC) is deﬁned as the predicted income in 1985 obtained from regressing the log of total income on age. education. 1984 and 1985. money market deposit accounts. vehicles and other real assets like art and precious metals. other real estate. automobile loans. loans. These are age. race.
2 presents summary statistics of the variables used. Households with retired household heads are assumed to be in the life-cycle stage of dissaving. The sample is restricted to families that did not change composition from 1983-86.931 and $3. For households with nonzero college expenditures.296. The average household net worth in 1983 is $81.575 in 1986 dollars. households with family income above $100.811.000 are excluded to avoid the diﬃculty of modeling the relationship between educational expenditures and savings. the typical household saves $5. respectively. The sample is also constrained to include only the households with nonretired household heads and their spouses if the head is married.005. Table 4. Table 4. The head of the median household reports that it is all right to borrow money for educational expenses.3 presents average household savings and college expenses by 85 .690 households.806 and according to second measure. The average household in the sample is headed by a forty two year old married high school graduate and includes two children. Estimating the relationship between savings and educational expenditures is complicated for families who experienced a major change in composition such as marriage and divorce.1 gives a detailed deﬁnition of the variables used in the estimation of the model. According to the ﬁrst measure of savings. Also. These restrictions leave us with a sample containing 1. it saves $4. Appendix C. the average expenditure is $2.is the diﬀerence between reported income in 1985 and estimated permanent income. Permanent and transitory incomes in 1985 are $25.
Households in the top 25 percentile of the wealth distribution with two or more children in college save on average $18. However. the number of children in college is inversely related to the expenditure per child as predicted by the quantityquality model. Savings of households with children in college increase with net worth.3 also breaks down savings and college expenses by the number of children in college and net worth in 1983. Table 4. household savings increase with the number of children in college. As the number of children in college increases.9) (4. 4. 25-75 percentile and top 25 percentile) spend less per child as the number of children attending college increases.077. The data show that college expenses increase with net worth. Households in all three wealth groups (bottom 25 percentile. more than twice as much the households in the same wealth group with one child in college. However.10) .4 Empirical Speciﬁcation The simultaneous relation between educational expenses (e∗ ) and house- hold savings (a) is speciﬁed as follows: e∗ = δ1 ni + x1i κ1 + u1i i ai = η2 e∗ + x2i κ2 + u2i i 86 (4. college expenditures per child decreases. Except the households in the bottom 25 percentile of the net worth distribution with two or more children attending college. The data show that households continue to save while children are in college. household savings increase with the number of children in college.the number of children attending college.
6 87 .e. u2i ) are assumed to be randomly drawn from a 2-variable distribution with E(ui ) = 0 and E(ui ui ) = . i.e.11) where x3i is a vector of demographic characteristics. the completed fertility.where x1i and x2i are the vectors of exogenous variables. and φi is an age speciﬁc factor. δ1 < 0. The structural disturbances ui = (u1i . The model predicts that an increase in the number of children decreases the anticipated and actual educational expenditure. Therefore. Another prediction of the model is that educational expenses increases household savings. η2 > 0. i. The empirical results hold true for this measure of fertility too. The theoretical model derives predictions concerning the eﬀect of the completed lifetime fertility on the educational expenses. κ3 is a vector of parameters. and κ1 and κ2 are the vectors of parameters to be estimated. the data on household fertility gives the number of children ever born to a household headed by a person of a certain age. n. However.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. is obtained to estimate the expected educational expenses. I use estimates of the parameters of a Poisson regression model to construct the completed fertility proﬁle when the household head is 55 years old. The expected completed family size is given by E[n] = exp(x3i κ3 + φi ) (4.
88 . Estimates of the coeﬃcients in Table 4. households headed by high school and college graduates have fewer children than those headed by persons without a high school degree.on ﬁnancing her education. Let gi = 1 indicate that the household has a child attending college. Married households have more children.4 contains estimates of the Poisson regression model of the fertility equation. race (BLACK) and the education of the household head (HIGHSCH and COLLEG). gi = 0 indicate that none of the children are attending college.5 Estimation and Results Table 4. Then I use the estimates of those parameters to construct the proﬁle of anticipated educational expenses.4 are consistent with previous studies. age (AGE). and a dummy indicating whether the household does not live in a SMSA area (NSMSA). gender (FEMALE). Controlling for permanent income. Then e∗ is observed to be ei if e∗ > 0 and gi = 1. An increase in the permanent income increases the number of children. 4. I obtain expected i i educational expenses as follows. martial status (MARRIED). a dummy indicating whether the spouse works for a full time job in 1983 (FSPOUSE). First. The right-hand variables include household demographics expected to aﬀect the number of children: namely. I estimate a Tobit model for the educational expenditures of the households with children attending college. However. and education of the spouse (HIGHSCHSP and COLLEGSP). permanent income (PERINC).
The average CHILD is 3. SEMERG. a dummy indicating whether or not the household head believes it is all right to borrow money for college expenses of children (BEDUCAT) and dummies indicating the most important reason for saving (SRETIRE. the amount of college expenditure decreases with the number of children.5 reports estimates of the equation (4. Columns 1 and 2 contain the results with CHILD and columns 3 and 4 contain the results with CHILD. -$187). 338 had a child attending college between 1983-86. and permanent and transitory income (PERINC and TRINC). The right-hand variables also include other factors that might aﬀect the college expenditures. namely.03. households with spouses working full-time and with high school and college degrees have fewer children. Of the 1.9). and 252 reported contributing a positive amount to their children’s college expenses. As predicted by the quantity-quality model. Households with children attending college between 1983-86 are included in the estimation of the Tobit regression. 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 . SCHEDUC and SHOME). 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).690 households in the sample. Table 4.controlling for marital status. The instrumental estimate of the coeﬃcient on the number of children is almost three times as large as the OLS estimate (-$459 vs.
and δ1 and κ1 are the estimates of δ1 and κ1 . The last two columns of Table 4. the average contribution of the top 25 percentile is $3.6 presents actual and estimated college expenses by household net worth in 1983.093 per 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. Φ is the standard normal cumuˆ ˆ lative distribution. CHILD. Estimated contributions of the households with children in college are very close to the actual expenses. an additional child results in a drop of $317 in expected college expenditures at the mean of values. I use estimates of the Tobit model and the expected completed fertility. Table 4. The amount of contribution to children’s college education increases with wealth. Estimates in Table 4.789 per child. ˆ Using the approximation.6 show SAVE1 and SAVE2 for households with 90 . to calculate the expected college expenditures (COLLEXP ). Households citing saving for retirement and buying a home as the most important reason for saving spend less on children’s education.12) where σ is the estimate of the standard error. While the average contribution of households in the bottom 25 percentile of wealth distribution is $1.436. ˆ σ (4. The average COLLEXP is $1.5 show that increases in permanent and transitory income increase the level of expenditures for educational expenses. respectively.variables as follows: ˆ ˆ δ1 ∗ Φ((δ1 ni + x1i κ1 )/ˆ ).
The estimates of SAVE1 and SAVE2 are very similar. Table 4. households with greater wealth save more if they have a child attending college. permanent and transitory incomes (PERINC and TRINC). a dummy indicating whether or not the household had a windfall greater than $3. Columns 1 and 2 contain the estimates for SAVE1.7 presents the eﬀect of expected college expenditures on household savings. indicating that an increase in expected college expenditure raises 91 . In estimates of both equations. Households in the bottom 25 percentile of wealth distribution save signiﬁcantly less than those without children in college. nonurban residence (NSMSA) and dummies indicating household net worth in 1983 (NWORTH25 and NWORTH75). the coeﬃcient of expected college expenditure (COLLEXP ) is negative and the coeﬃcient of age interaction term (AGE×COLLEXP ) is positive. households in top 25 percentile of the wealth distribution save almost ﬁve times more if they have a child in college. Similar to Table 4. and columns 3 and 4 contain the estimates for SAVE2.and without children in college. However.3.6 show that wealthier families contribute more to their children’s education and continue to save while their children are in college.000 between 1893-86. Explanatory variables include age (AGE). gender (FEMALE) of the household head. two other reasons for saving. Interestingly. which are retirement and emergencies (SRETIRE and SEMERG). the data in Table 4. and the number of children attending college between 1983-86 (NCHCOLL). a dummy indicating whether the household head is willing to take risky investments (RISKY).
However.398 less than those in the middle of the wealth distribution . households with heads who are willing to undertake risky investments save $7.833 more than other households. 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 1983.7. the data does not have detailed information on the years that children were attending college between 1983 and 1986. Also. the number of children attending college does not signiﬁcantly decrease household savings.493 more and households in the top 25 percentile save $11. Finally. Using the estimates in Table 4.1 shows the eﬀect of the age of the household head on SAVE1. Households citing saving for retirement as the most important reason save more. households in the bottom 25 percentile of the wealth distribution save $2. the ﬁgure ﬁrst calculates savings of a typical household expecting to contribute $2. household savings are calculated in ﬁve year intervals. citing a motive other than retirement or emergencies as the most 92 .000 to college expenses and compares it to what it would have saved. had it not expected to contribute a positive amount. I mean a household in the 25-75 percentile of the wealth distribution. Figure 4. The eﬀect of transitory income on both measures of savings is positive and signiﬁcant. Unfortunately. For each age group. This result does not necessarily mean that households are not saving for children’s college education. By typical.savings after age 28. Finally. saving for emergencies does not signiﬁcantly aﬀect savings. showing that households save approximately 39 percent of their transitory income. Permanent income increases both SAVE1 and SAVE2.
the eﬀect of anticipated college expenses on savings is positive and signiﬁcant. for example. The results in Table 4. If the household does not expect to contribute to children’s college expenses.000 between 1983-86. Saving motives change with age and household composition.7 show that the eﬀect of saving for retirement on household saving is positive and raises household savings by $4. If we assume.894. The eﬀect of expecting to contribute $2000 on household savings is $8. The household is assumed to have average permanent and transitory incomes for their age group.6 Conclusion This chapter examines the eﬀect of saving for children’s college edu- cation on household savings. and it increases with the age of the household head. headed by a male. This striking result is due to the assumption that this household is assumed not to cite saving for retirement as the most important reason. I introduce life-cycle savings into the quality and quantity model of fertility and derive predictions concerning the eﬀect of educational expenditures on household savings. This ﬁgure only shows that controlling for other factors. The results show that savings of the household with an anticipated $2. savings decline to zero at the age of 43. I also obtain predictions 93 .000 college expenses increase with age. who is not willing to undertake risky investments and did not receive a windfall greater than $3.important saving motive. this will increase its saving by $4.000 at the age of 43.894. that this household starts saving for retirement when the household head is 43 years old. 4.
The results are consistent with the predictions of the life-cycle theory of saving and consumption that households save in advance for expected expenses.000 at the age of 43. The amount of savings for college expenses increases with the age of the household head. By focusing on household savings. 94 . The main ﬁnding of this chapter is that households save in advance for children’s college expenditures. Using the actual college expenditures reported in the 1983-86 Survey of Consumer Finances. and the change in net worth excluding the capital gains on primary residence. 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. which are the change in net worth between 1983 and 1986. I analyze the eﬀect of educational expenditures on two diﬀerent measures of savings. The results are also consistent with the ﬁndings in Souleles . 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.concerning the simultaneous determination of family size and college expenditure per child. households smooth consumption into the academic year and do not cut consumption in the 6-9 months before the academic year starts. Other things constant. which show that despite large college expenses. the diﬀerence between savings of households with and without college expenses can be as high as $8.
345 SEMERG SCHEDU 0.337 0.264 0.064 0.029 0.380 NOSAVE 0.079 0.341 0.043 0.049 0.053 0.397 0. SHOME: saving to buy a home.049 0.016 0.Table 4.070 0.471 0.382 0.223 0.066 0.007 0.278 0.082 0.469 0.063 0.120 0.053 SHOME 0.’ SCHEDU: saving for the education of children. SRETIRE: saving for retirement.102 0.074 0.043 0.212 0.115 0.032 25-75p 75 to 100p Source: Survey of Consumer Finances.153 CHILD 0 1-2 3 or more 0.002 0.391 0.383 0. Notes: This table reports the proportion of households citing the selected motives as the most important reason for saving.009 0.244 0.310 0.023 0.033 0.010 0. Tabulations are weighted using the sample weights.042 0. The number of observations N=1690.057 0.004 0.377 0.543 0.087 0. 1983.058 0.404 0.023 HH 0.1: Saving Motives By the Number of Children SRETIRE 0.068 0.042 0.027 0.000 0.279 0. SOTHER: saving for other reasons and NOSAVE: cannot/does not save.083 0.330 0.369 0.455 0.440 0. SEMERGE: saving for ‘rainy days.060 0.016 95 0.339 0.000 0.037 NWORTH 0-25p 0 1-2 3 or more 0 1-2 3 or more 0 1-2 3 or more 0.057 0.009 0.401 0.000 0.381 0.027 0.021 0. .355 0.351 0.035 SOTHER 0.013 0.341 0.
24 0.43 HIGHSCH 0.08 161860.68 AGE 42.17 0.11 12491.24 0.37 NSMSA 0.35 WINDF 0. Notes: Tabulations are weighted using sample weights.50 BLACK 0.75 TRINC 3296.64 NWORTH 81575.65 0.Table 4.32 2817. All variables are described in Appendix C.53 0.43 14.48 BEDUCAT 0.1.32 15127.33 MARRIED 0.43 COLLEG 0.10 FEMALE 0.08 0. 96 .45 Source: Survey of Consumer Finances.41 33402. Deviation CHILD 2. All dollar values are reported in 1986 dollars.36 SAVE1 5806.47 2.13 35397.28 RISKY 0.14 COLLEXP> 0 2005.28 0.2: Descriptive Summary of Variables Variables Mean Std.86 0. 1983-86. The number of observations N=1690.47 SAVE2 4811.86 PERINC 25931.13 0.
97 .Table 4. The number of observations N=1690. Tabulations are weighted using sample weights. 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 25-75p 75-100p Source: Survey of Consumer Finances. 1983-86. Notes: NCHCOLL shows the number of children attending college between 1983-86.
964 0.717 0.038 0.126 ** -0. Notes: ** indicates signiﬁcance at 5 percent level.134 ** 0. 98 .1.408 0.930 0. 1983-86.062 ** 1690 2.078 0.106 0.039 ** -0.Table 4.032 0. Variables are described in Appendix C.435 0. Error -1.4: 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.43 -2971.004 ** -0.389 0.022 0.057 ** -0.128 ** 0. and * indicates signiﬁcance at 10 percent level.038 0.062 ** 1.48 0.293 Source: Survey of Consumer Finances.097 ** 0.461 0.090 ** -0.145 ** 0.
All variables are described in Appendix C.4 1589.6 408.4 92.1 611.Table 4.8 ** -1103.9 2912.8 473.9 557.1.9 -458.3 134.4 23.5 472.7 338 .81 CONSTANT AGE CHILD CHILD PERINC/1000 BEDUCAT SRETIRE SEMERG SCHEDUC SHOME COLLEG TRINC/1000 SIGMA N OBS Proportion of + observations Log L ** ** * ** ** * ** ** -2429.0 0.1 72. Error -601.8 468.5 18.4 555.7 * 997.5 551.0 ** 72.6 -407.1 1063.2 19.746 -2429.3 609.2 88.2 2524.6 -1124.8 232.9 ** -4903.0 ** 2905.6 133.9 -45.0 9.4 10.9 ** 67.5 22. 99 .7 1467.6 1452. Notes: ** indicates signiﬁcance at 5 percent level.1 550.70 Source: Survey of Consumer Finances.3 2444.9 ** -187.1 -4936.7 ** 1391.5: Tobit Estimates of College Expenditure Equation Coeﬃcient Std. 1983-86. and * indicates signiﬁcance at 10 percent level. Error Coeﬃcient Std.8 -7.5 -1335.0 409.8 -372.
02 0 7. 1983-86.65 0 1. 100 .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. Notes: Tabulations are weighted using sample weights. All dollar values are reported in 1986 dollars.29 1436 44.59 2334 17.93 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.Table 4. The number of observations N=1690. CHCOLL=1 if the household has a child attending college between 1983-86 (0 otherwise).52 0 5.
5 1325.5 -1310.5 2409.1 4.8 160. 1983-86.9 2474.6 -315.107 SAVE2 Coeﬃcient Std. a Predicted value of the variable from Tobit regression of educational expenditures.6 1516.0 7833.0 1271.6 388.1 3139.1 * 4679.4 2434.1 2796.9 1728.6 2026.7 ** 0.8 . Notes: ** indicates signiﬁcance at 5 percent level.9 11080.2 -10.3 0.4 2538.0 1642.8 3199. Error ** 22327.3 0.2 3422.3 * 3028.3 10.0 2460.8 -615.5 2493.1.0 382.3 -774.1 4894.8 163. Error 22618.3 2016.3 416.9 139.6 407.8 4.2 ** -9.5 0. All variables are described in Appendix C.7: Eﬀect of Anticipated College Expenses on Savings ** ** ** ** ** ** ** * ** ** ** 101 CONSTANT AGE AGE2 PERINC/1000 TRINC/1000 a COLLEGEXP a AGE×COLLEGEXP SRETIRE SEMERG NWORTH25 NWORTH75 WINDF RISKY FEMALE NSMSA NCHCOLL R2 SAVE1 Coeﬃcient Std.3 ** 309.2 3.6 10944.Table 4.0 5607.3 2954.0 -11398. .8 382.8 3349.8 ** 6820.2 ** -1284.084 Source: Survey of Consumer Finances.8 2783.0 -790.3 ** 10.2 5041.6 ** -9329. and * indicates signiﬁcance at 10 percent level.2 1820.8 761.2 3.4 ** 336.5 .8 140.
102 . • savings of a household with no college expenses. 736 − • • • | 23 −1. 791 − ? savings of a household with $2000 college expenses.Figure 4.1: The Importance of Educational Expenses on Savings SAVE16 10. 045 − • 3. 068 − | 28 | 33 | 38 | 43 • | 48 | 53 Age • • −5.
Appendices 103 .
number of dependents. tax-exempt interest.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. I use the information on marital status. and age of the household head and the spouse. taxable interest. including wage and salaries. households are assumed to claim standard deductions instead of itemizing deductions. job expenses and moving expenses. alimony received. dividends.Appendix A Appendix for Chapter 2 A. In determining ﬁling status and personal exemptions. rents. All married couples are assumed to ﬁle a joint return. Thus. business income and farm income. Subtracting the standard deduction and exemptions from the AGI 104 . Components of income such as other gains and IRA distributions that are not reported in the SCF are set to zero. royalties. The sum of household income from all sources gives the adjusted gross income (AGI). state and local income taxes. The SCF collects information on many components of total income.
=1 if three or more children are living in the household. A. CHILD0 CHILD1 CHILD2 CHILD3 =1 if no children are living in the household. INCOME ASSET MTR Eh Total assets of the household. I then apply the appropriate tax rate schedule to calculate the household’s tax liability. AGE MARRIED FEMALE NCHILD Age of the household head in years. Number of children younger than age 22 who live in the household.3. =1 if the household head is a single female. Consumption demand for housing. See Appendix A. 105 . The diﬀerence in total tax liabilities divided by 100 gives the marginal tax rate. For homeowners. it is the opportunity cost of owning a house. =1 if only one child is living in the household. The marginal tax rate is computed by running this method twice . =1 if the household head is married. See Appendix A.once with AGI and then with AGI minus 100.yields the taxable income.1. =1 if two children are living in the household.2 Name Deﬁnition of Variables Description Estimated earnings of the household head and spouse at the age of 45. Marginal tax rate of the household.
and c(AGEi ) is a cohort eﬀect. and the second is transitory changes in earnings. (A. βp is the parameter vector.CHAGE13 HOMEOWN WHITE RISKY =1 if the youngest child is older than age 13. =1 the household is a homeowner. Thus.1) where Zi is a vector of observable characteristics. Observed earnings are assumed to diﬀer from permanent income in two ways. The permanent income Y for individual i is deﬁned as Ln Yi = Zi βp + εpi − c(AGEi ). This measure is deﬁned as predicted earnings at the age of 45 plus an individual-speciﬁc eﬀect. A. =1 if the household is included in the 1995 survey. The ﬁrst is due to the movements along the age-earnings proﬁle over the life cycle. YEAR92 YEAR95 YEAR98 =1 if the household is included in the 1992 survey. earnings 106 . εpi is an unobservable variable measuring characteristics such as ability (εpi 2 has zero mean and variance of σs ). =1 if the household head is white. =1 if the household is included in the 1998 survey.3 Estimating Permanent Income The measure of permanent income is constructed using the method outlined in King and Dicks-Mireaux . =1 if the household head reports that he is willing to take risky investments.
in year t are Ln Eit = Ln Yi + e(AGEit − 45) + uit . Earnings equations are estimated separately for household heads and spouses.2) where e(. I assume that the cohort eﬀect. To construct an estimate of permanent income. Since age-earnings proﬁle e(AGEit − 45) and c(AGEi ) cannot be identiﬁed for this estimation. I need the estimates of βp . to get an estimate of εpi . I combine (A. εpi and c(AGEi ). ˆ (A. ˆ is zero.5. Instead. King and Dicks-Mireaux  use outside data to impose a cohort eﬀect. I calculate the minimum variance estimator of εpi using εpi = α(εpi + uit ). and is assumed to be uncorrelated with εpi ).) measures the log of the age-earnings proﬁle. permanent income is calculated from Zi βp . I assume that α = 0.2) and estimate the resulting earnings equation using each wave of SCF separately.3) 2 2 2 where α = σs /(σs + σu ). For heads with zero ˆ earnings. Their permanent income is adjusted for 107 .1) and (A. with one exception. The selectivity-adjusted earnings functions are estimated for the sample consisting of individuals with nonzero earnings. c(AGEi ). and this provides the ˆ estimate βp . Finally. The same procedure is used for spouses. (A. 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 . Following King and Dicks-Mireaux .
non-participation at diﬀerent stages of the life cycle as follows: ˆ Yiw = Yi P rob(Ei > 0). 108 . and the probability of nonzero earnings is computed for each spouse from the probit estimates. Household permanent income is the sum of the estimates of permanent income for the head and spouse. ˆ where Yi is the permanent income estimate.
1 Name SAVE1 Deﬁnition of Variables Description First diﬀerence in net worth between 1983-89 divided by 6.Appendix B Appendix for Chapter 3 B. VRI MEANINC PERMINC TRANS NWORTH NWORTH25 Variance of log income. 109 . NWORTH90 =1 if the household in the 10 percent of the net worth distribution in 1983. Mean of reported income between 1982-88. VRLI Variance of residual of log income from the earnings equation. Mean of the predicted income from the earnings regression. AGE Age of the household head in 1983. Mean of the residual income from the earnings regression. Household net worth in 1983. SAVE2 First diﬀerence in net worth between 1983-89 controlling for capital gains in home prices divided by 6. =1 if the household in the bottom 25 percent of the net worth distribution in 1983.
Number of children between age 0-6 in 1983. Number of children between age 7-12 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 household head is married. =1 if the household owns a home in 1989. =1 if the spouse is working fulltime in 1983.EDUC WHITE MARRIED NCHILD YOUNGCH MIDDCH HIGHSCH ∆CHILD Years of education of the household head in 1983. =1 if the household had an additional child between 1983-89. NADULT ∆NADULT BEQUEST HOWN83 HOWN89 SPFULLT Number of adults living in the household in 1983. 110 . Change in the number of adults between 1983-89. Number of children living in the household in 1983. =1 if the household owns a home in 1983. =1 if the household head is white.
111 . =1 if the household head is female.1 Name CHILD COLLEXP Deﬁnition of Variables Description Number of children ever born to the household head. Diﬀerence between net worth in 1986 and 1983 divided by 3. AGE FEMALE HIGHSCH Age of the household head in 1983. Diﬀerence between total income in 1985 and permanent income.Appendix C Appendix for Chapter 4 C. NWORTH NWORTH25 Net worth in 1986. =1 if the household is in the bottom 25 percentile of the wealth distribution. NWORTH75 =1 if the household is in the top 25 percentile of the wealth distribution. PERINC TRINC SAVE1 SAVE2 Predicted 1985 household income. Diﬀerence between net worth in 1986 excluding the capital gains on primary residence and net worth in 1983 divided by 3. Amount of expenditure on the college education of a child in 1986 dollars. =1 if the household head has a high school degree.
112 . =1 if the household head is African-American.COLLEG =1 if the household head has a college degree. WINDF =1 if the household received a windfall greater than $3. Number of children attending college between 1983-86. BEDUCAT =1 if the household head thinks it is all right to borrow for education. =1 if the household head is married. NSMSA NCHCOLL =1 if the place of residence is not in a SMSA. =1 if the spouse is working at a full-time job. SHOME =1 if saving to buy a home is the most important reason for saving. COLLEGSP FSPOUSE BLACK MARRIED RISKY =1 if the spouse has a college degree. =1 if emergencies are the most important reason for saving.000 between 1983-86. =1 if children’s education is the most important reason for saving. =1 if the household head is willing to undertake risky investments. SOTHER =1 if the household cited another reason as the most important reason to save. SRETIRE SEMERGE SCHEDU =1 if retirement is the most important reason for saving. HIGHSCHSP =1 if the spouse has a high school degree.
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1970. She received her Bachelor of Arts degree in Business Administration from Boˆazi¸i University in January 1994.Vita Tansel Yilmazer was born in Izmir. g c She began her graduate studies at Boˆazi¸i University. 121 . the daugh¨ ter of Onder Yilmazer and Necla Yilmazer. Turkey on June 2. she accepted an assistant professor position at Purdue University. Permanent address: 834 Main Street Apt. B Lafayette. IN 47901 This dissertation was typed by the author. where she received a g c Master of Arts degree in Economics in June 1997. She later continued her education at the University of Texas at Austin. Eﬀective August 2002.
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