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The Dissertation Committee for Tansel Yilmazer certiﬁes that this is the approved version of the following dissertation:

Household Saving Behavior, Portfolio Choice and Children: Evidence from the Survey of Consumer Finances

Committee:

Daniel T. Slesnick, Supervisor Don Fullerton Maxwell B. Stinchcombe Peter J. Wilcoxen Jacqueline Angel

Household Saving Behavior, Portfolio Choice and Children: Evidence from the Survey of Consumer Finances

by Tansel Yilmazer, B.S., M.A.

DISSERTATION Presented to the Faculty of the Graduate School of The University of Texas at Austin in Partial Fulﬁllment of the Requirements for the Degree of DOCTOR OF PHILOSOPHY

THE UNIVERSITY OF TEXAS AT AUSTIN December 2002

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

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

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

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

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

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

. . . . . . . . . . Regressions of SAVE2 on Income Uncertainty with Endogenous Fertility Decision . . . . Saving Motives By the Number of Children . . . .2 4. . . . . . Mean Asset Shares by Year . . . . .5 Descriptive Statistics by Year . . . . .1 2. . Results: Asset Shares and Housing Expenditure of Renters . . . . . . . . . . . . . . . . . . .5 2. . . . . .3 2. . . . . . . . . . . .4 3. .8 2. . . . . . . . . . . . The Eﬀect of a Change in the Fertility Decision on SAVE1 . . . . Savings and College Expenses by the Number of College . . . . . .2 2. .3 3. . . . . . . . . . . . . . . . . . . . . . . . . . Mean Income Uncertainty by Household Demographics . Tobit Estimates of College Expenditure Equation ix . . . . . . . . . . Portfolio Shares for Assets by the Number of Children and Age Saving Motives by Age Groups. Expenditure on Housing. . . 1998 . . . . .7 3. 33 34 35 36 37 38 39 40 41 42 43 65 66 67 68 69 70 71 72 95 96 97 98 99 . . . .2 3. . . . .List of Tables 2. . . 1998: Continued . . . . . . . . Mean Asset Shares. Income and Income Uncertainty by Age and Fertility Probit: Fertility Decision of Fecund Households . . . . . . . . . . Renters: Continued . . .10 2. . . . . . . . . . . . . Results from Probit Estimation . . . . . . . .4 4.8 4. . Results: Asset Shares and Housing Expenditure of Homeowners Homeowners: Continued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 4. . .7 2. . . . . . .3 4. . . . .4 2.1 3. . . . . .6 2. . . Descriptive Summary of Variables . . . . . . . . . . . . . .5 3. . . . Children in . . . . Savings. . . . .6 3. . . .11 3. . . . . . Mean Asset Shares. . . Regressions of SAVE1 on Income Uncertainty with Endogenous Fertility Decision . . . . . . . . . 1998 . . . . . . . . . . . .9 2. . . . 1983 . . . . . . . Descriptive Statistics by Household Fertility Decision . . . . Poisson Regression: Number of Children . . . . . . .

. . . . . . . .6 4.7 College Expenditures and Savings by the Number of Children in College . . . . . . . . . . . . . Eﬀect of Anticipated College Expenses on Savings .4. . . . . 100 101 x . . . . . . . . . . .

List of Figures

4.1

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

102

xi

Chapter 1 Introduction

Raising children is costly with their housing, educational and other expenses. To meet the costs of raising their children, parents use both current income and intertemporal transfers. Children living in the household, therefore, are likely to aﬀect the level of household savings, portfolio composition and the life-cycle proﬁle of savings. Using data from the Survey of Consumer Finances (SCF), this dissertation examines the relationship between children and the motives of saving: (i) to hold assets because of the return they provide, (ii) to build up reserves as a precaution for a ‘rainy day,’ and (iii) to accumulate for anticipated future needs, such as educational expenses. Most U.S. households hold a large portion of their wealth in the form of owner-occupied housing. According to the 1995 SCF, 65 percent of households are homeowners, and the value of an average homeowner’s property is 60 percent of its total assets. Owner-occupied housing diﬀers from other types of wealth in its dual role as both a consumption good and an investment good. Since households cannot separate the level of consumption of housing services from investment in housing as an asset, the optimal level of owner-occupied housing may be higher than the optimal level for households only interested

1

in long run returns. The demand for housing services is likely to increase with the number of children living in the household. Therefore, the consumption constraint can be even more binding for households with children. Chapter 2 uses the 1989, 1992, 1995 and 1998 SCF to investigate how the number of children living in the household aﬀect the portfolio choice between housing and other assets. The portfolio allocation of homeowners is compared to that of renters by taking into account the portfolio constraint imposed by the consumption demand for housing. The empirical model also examines the eﬀect of children on the demand for housing services and homeownership decision. The results show that the number of children increases the housing consumption of homeowners as well as the share of the portfolio allocated to owner-occupied housing. As a result of the portfolio constraint, homeowners decrease the portfolio share of retirement assets as the number of children increases. Low levels of retirement savings of U.S. households have generated signiﬁcant concern in the last twenty years. The ﬁndings of Chapter 2 show that households with children decrease the portfolio share for retirement savings considerably while they increase the portfolio share for housing. If the return on housing is less than the return on retirement accounts, there is a hidden cost of children. Explaining the size of the portfolio eﬀect allows a better understanding of the cost of children. Also, changes in housing programs or tax deduction rules for mortgage interest payments inﬂuence the portfolio allocation of households with children considerably by increasing or decreasing the 2

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. however. The ﬁndings. household saving show that saving rates are higher for married couples with no children and lower for those with children. having an additional child decreases savings of households with young heads and increases savings of those with older heads. By examining the implications of uncertainty on the fertility decisions of households and incorporating fertility decisions as a motive for household saving behavior. The data on U. Chapter 3 investigates the relation between household saving and fertility decisions. The 1983-89 panel of the SCF is used to examine the interaction of income uncertainty and changes in the number of children on the saving behavior of households at diﬀerent stages of the life cycle. Using a life cycle model that incorporates precautionary motives for saving. Also.cost of homeownership. this chapter extends the empirical work on precautionary saving. 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. 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.S. This ﬁnding is consistent with the life-cycle theory of saving and consumption and shows that household composition is an important factor 3 .

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

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

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

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

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

5 percent. the homeowner’s optimal portfolio is ineﬃcient in a mean-variance framework. 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. In Berkovec and Fullerton. For example. Their simulation concentrates on the eﬀect of taxes on the tenure choice and owner-occupied housing. households decide on tenure and quantity of housing taking both consumption and investment motives into account. [26] treat the presence of children in the household as endogenous and ﬁnd that a 10 percent increase in the probability of having a child raises the likelihood of homeownership by 2. The literature on housing demand has recognized the role of children on the tenure choice and the demand for housing services. Flavin and Yamashita use numerical methods to calculate the mean-variance eﬃcient frontier. Harun et al. Neither of these studies explicitly analyzes the determinants of the consumption demand for housing and the portfolio share for housing. [36] show that 9 . 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. The results of his model show that when the constraint imposed by housing is binding. His model analyzes the resulting distortion of the eﬀect of this investment constraint on the portfolio choice of homeowners. Robst et al.an investment constraint requires that the quantity of housing owned is at least as large as the quantity of housing consumed.

according to the 1995 SCF.S. as noted in Goodman [24]. For example. Many studies have investigated the reasons that most households choose to hold incomplete portfolios. and race of the household head are shown to be signiﬁcant factors that reduce the level of information cost that would be suﬃcient to 10 . Ihlanfeldt [33] reports housing demand estimates obtained separately from two samples-recent movers and nonmovers. their results show that the presence of children in school has either an insigniﬁcant or a negative eﬀect on the demand for housing. After controlling for the household size. The results of the previous studies show that dependent children have some impact on the demand for housing. Besides housing. Goodman and Kawai [25] ﬁnd that larger households prefer more housing. The information cost of monitoring and managing a portfolio is suggested as an important reason for holding riskless assets. marital status. U. deﬁned beneﬁt pensions and mutual funds. However. households typically invest in only a few of the assets available in the economy. Among recent movers.an additional child increases the probability of owning a home by around 8 percent. only 41 percent of households held stocks directly or indirectly in IRAs. 401(k)s. however. Demographic characteristics such as age. little systematic treatment of children has appeared in the estimation of tenure choice and housing demand. these variables do not aﬀect the housing demand of homeowners. 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 eﬀect of age and marital status appears to be signiﬁcant only for some of the assets. King and Leape [41] analyze a model in which investors choose to hold incomplete portfolios.discourage households from investing in risky assets. Using the Panel Study of Income Dynamics. Chiteji and Staﬀord [13] link independent young African-American adults back to their parents. taking into account the eﬀect of children on the consumption demand for housing. Children living in the household have not been the focus of any study examining the portfolio choice of households. Their ﬁndings show that age and marital status of the household head signiﬁcantly aﬀect the probability of asset ownership. His results show that household characteristics such as age and education of the household head are signiﬁcant in explaining the probability of owning stocks. This chapter aims to do so by examining the eﬀect of the number and the age of children on household portfolio choice. and they estimate equations for both the probability of owning an asset and its demand conditional upon ownership. The results show that the number of children has a positive and signiﬁcant eﬀect 11 . Bertaut [5] uses the 1983-89 SCF to analyze the eﬀect of household characteristics on portfolio allocation. however. For example. Their ﬁnding is that parents who held stocks are more likely to have children who hold stocks as young adults. The theoretical model developed in the chapter shows how the portfolio constraint imposed by the consumption demand for housing aﬀects the portfolio shares for housing and other assets. In the conditional demand equations. The empirical model compares the portfolio allocation of homeowners to that of renters.

The number of children also increases the housing demand of homeowners. and how much to allocate to other risky assets.2.2 2. Controlling for the number of children and other variables. The consumer maximizes a multiperiod utility function. 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. Renters invest a smaller share of their portfolio in interest-bearing accounts with an increase in the number of children. The estimation results are reported in Section 2. homeowners with all children older than age 13 invest a greater share of their portfolio in vehicles and other real estate and a smaller share of their portfolio in housing. 2.2 introduces the theoretical model and discusses the empirical speciﬁcation of the model. homeowners decrease the portfolio share in retirement accounts while they increase the portfolio share in housing. 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.on the probability of owning a home.4.3 describes the data set and the variables used in the empirical work. Section 2.5. A summary of the ﬁndings and concluding remarks are presented in Section 2. As a result of the portfolio constraint imposed by the housing demand of children. Children living in the household also aﬀects the portfolio choice of renters. Following Brueckner [7] and 12 . Section 2.

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

j = 1.5) since h is equal to zero for renters. the return on housing and the return on other assets are assumed to be normal variables with the expected values rh and rj .4) where po r is the price of a unit of housing for renters.6) and (2. (2. 14 . respectively. and θjh is the covariance of returns between asset j and housing.7). h The total return of the portfolio is given by J R = rh h + j=0 rj aj .7) where θhh and θjj .where w is her initial wealth and po is the current price of a unit of housing. are the variances of rh and rk . h = 0 in equations (2. For renters. the total portfolio return R is a normal random variable with the expected value J R = rh h + r0 a0 + j=1 r j aj (2. (2. The total return of the J portfolio is given by R= j=0 rj aj . . J.6) and the standard deviation J J K σ = (θhh h + 2 j=1 2 haj θhj + j=1 k=1 aj ak θjk )1/2 . (2..J. (2. For homeowners. θjk is the covariance of returns between asset j and k.... then the ﬁrst period budget constraint is given by J c = w − po hc − r j=0 aj .3) If the consumer rents a house. j = 1. . 2. In the model.

. (2. j = 0.4).. 1. . that maximize (2. (2. hc ) + δ V (R + σz + y)φ(z)dz. (2. c j (2. (2.2.1) subject to (2. how much to spend on housing (Eh ). J. I rewrite the objective function (2.. For both homeowners and renters. the asset levels aj . and the standard normal variable z as follows: U (c.8) where φ(. The empirical model described in the next section focuses on the interaction between these two stages of decision making. The consumer also decides on c∗ .. In the ﬁrst stage. that maximize (2. 2.1) in terms of R.6) and (2.5).6) and (2..2 Empirical Model The joint determination of whether own a house (H=1) or not (H=0). a household determines whether to own or rent a house: H = 1 if Xh β1 + ε1 > 0 = 0 otherwise. are chosen optimally with hc and σ held constant. (2. this problem can be solved in two stages. First. and to owner-occupied housing (sh ) is modeled as follows.. j = 0. J. . J. and a∗ .2).Following Fama and Miller [21] and Brueckner [7]. h∗ and a∗ . j = c j 0.) is the standard normal density function.. σ.7).8) subject to (2. 1.3). In the second stage. 1.7) and decides to own or rent a house comparing the utilities in two outcomes. The consumer’s problem is to choose c∗ .9) where Xh is a vector of year dummies and characteristics that are associated 15 .. h∗ . hc (and thus σ) is chosen optimally. and shares of wealth to allocate to each asset j (sj ).

βoc and βrc are the parameter vectors to be estimated. εrj .. as a regressor in estimating (2. and also the housing expenditure: j = 0. Similarly. 1. J. (2.. J sj = Xβoj + εoj sh = Xβh + εh If owner.. J..9) .11) where X and Xc are vectors of household characteristics and year dummies. εoc . Second.11). 16 . 1. βrj .with the probability of owning a house. a probit model of the tenure choice in equation (2. and εoj . εh . . 1.9) provides an estimate of β1 . In the ﬁrst stage. and εrc are the error terms. βoj ..11) are assumed to have a joint normal distribution. Separate equations are speciﬁed for homeowners and renters.. respectively. log Eh = Xc βoc + εoc .. the household decides on the share of portfolio allocated to each asset and housing. 1. φ(X β1 )/(1 − Φ(X β1 )) is used as a regressor for renters in estimating (2. β1 is a parameter vector.10) (2. j = 0. I use ˆ ˆ φ(X β1 )/Φ(X β1 )... . In the second stage. and ε1 is an error term..(2. . where φ and Φ are probability density and cumulative distribution of the standard ˆ ˆ normal distribution.10) for homeowners. and the error terms in equations (2. . The two stage method described in Lee and Trost [42] is used to estimate the model. j = 0. J sj = Xβrj + εrj sh = 0 If renter... log Eh = Xc βrc + εrc . j = 0. βh .

income. 6) RESTATE includes the market value of seasonal residences and other property. The survey contains detailed information on household portfolios. and other deﬁned contribution plans. 1992. 2) STOCK includes all assets held in stocks. money market deposit accounts. 1995 and 1998 SCF.3 Total assets are grouped into six categories: 1) ACCOUNT includes all holdings of checking accounts. and demographic characteristics. all types of bonds. population. 5) VEHICLE is the value of all the vehicles the household owns. Investments in businesses are not included in total assets because they generate an income that is diﬃcult to separate from earnings. 3 17 . 4) HOUSE is the market value of owner-occupied housing. in 1995. and in 1998.2. 1.309 households.480 out of 3. Each survey consists of a representative sample of the U. 1. 3) RETIRE includes IRAs. and mutual funds. saving accounts.299. cash value of life insurance. The SCF constructs sample weights to blend the supplements with the area-probability sample to get a more representative sample of the U. call accounts.S.S. The consumption demand for housing is computed for renters and homeowners as follows.3 Data The data for this study are taken from the 1989.906. certiﬁcates of deposit. in 1992. and 7) OTHER includes trusts.409 out of 4. population and a supplement of high-wealth households drawn from Internal Revenue Service ﬁle of high-income returns. 401(k)s. Keogh.519 out of 4. 1. the cost of housing services depends on In the 1989 SCF. the supplement consists of 866 out of 3. For owners. and other assets like arts and precious metals. a triennial survey conducted by the Federal Reserve Board.143 households.

Property tax rates and mortgage interest payments are reported in the SCF. households that neither rent nor own their homes are excluded for lack of information to cal18 . π. The interest rate. the property tax rate (τp ). and the rate of increase in house prices. Following Henderson and Ioannides [28]. A few restrictions are imposed on the sample. the income tax rate (τ ). First. r. the mortgage interest payment (m).12). The inﬂation rate. is the annual inﬂation rate calculated using the CPI-U deﬂator. Since marginal tax rates are not reported in the SCF.the gross value of the residence (G). is assumed to be the interest rate on treasury bills. I assume an annual rate of depreciation of d=0. I impute them using detailed account information on the sources of income and demographics for each household. ρ. For renters.12) This formulation assumes that homeowners claim tax deductions for property taxes and mortgage interest payments. the rate of increase in the nominal price of housing (ρ) and the overall inﬂation rate (π).015 for each of the sample years. maintenance and depreciation costs (d). I make several assumptions. (2. the interest rate (r). The housing expenditures (Eh ) of homeowners are then deﬁned as Eh = [(1 − τ )r + d + (1 − τ )τp − (ρ − π)]G − mτ. the annual rental expenditure reported in the SCF is used as the consumption demand for housing. The calculation of marginal tax rates is described in Appendix A. is the rate of increase in the median sale price of houses in that year. To calculate the housing expenditure by using equation (2.1.

The variables are described in detail in Appendix A. households with female heads are headed by single females.1 percent weighted wealth holdings in each wave of the SCF are dropped. to avoid the inﬂuence of extreme outliers on the regression.1 percentile of the weighted wealth distribution in the 1989. most of which have not changed much over time. 209 and 193 were in the 0. In 1989.2. 1992. 183. Therefore. respectively. respectively.3. 127.5 The ﬁnal sample consists of 13. 214. 116. 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. respectively. 1995 and 1998. The same pattern is true for permanent income (INCOME). marital status (MARRIED) and gender (FEMALE) of the household head and the fraction of homeowners (HOMEOWN). 1995.989 observations. I take the estimated earnings of the household head and the spouse at the age of 45 and an individual-speciﬁc eﬀect.culate housing expenditure. and 1998 SCF. 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. 1995 and 1998. households with the highest 0.1 shows the summary statistics for all the variables used in the estimation. As a proxy for permanent income.807 households in 1989. The calculation of permanent income follows King and Dicks-Mireaux [40] and is described in Appendix A. 1992. 4 19 . 1992.509. or (iii) it owns part or all of the farm/ranch on which it lives on.6 However.900. (ii) it owns both the mobile house and the site. 5 Of the remaining households. Table 2. 3. both mean and median wealth (ASSET) have risen since 1992. 3. Sample demographics show the age of the household head (AGE).4 Second.773 and 3. a co-op or a townhouse association. 317 and 309 households were neither renters nor owners and were dropped from the sample. 6 The SCF deﬁnes the head of the household to be the husband for all married households. 2.

Second. Assets in these accounts increased from 5. there is a steady growth in the portfolio share for STOCK and a steady decline in the portfolio share for RESTATE since 1989. the share for RETIRE increases sharply. HOUSE is the most important asset.2 percent in 1998 due to an increase in the portfolio share for saving accounts.2 percent in 1995.2. The percentage of households with all children older than age 13 (CHAGE13) has stayed the same since 1992.3 presents housing expenditures of homeowners and renters in 1998. STOCK and RETIRE in 1998 oﬀset the decline in HOUSE.83 in 1989 to 0. First. wealth and children (the number of children living in the household) groups. As shown in Table 2. the composition of households’ portfolios reveals the importance of housing as an asset. The portfolio share for ACCOUNT declined from 14.4 percent of total assets in 1998.75 in 1995 and stayed the same in 1998. followed by ACCOUNT.5 percent in 1998.was higher for homeowners in 1992 than in other years due to the decline in house prices in that year. but it rose to 13.3 percent in 1989 to 11. The ﬁrst column shows the share of households in diﬀerent income. The increases in ACCOUNT. Table 2. VEHICLE and RESTATE.7 percent of total assets in 1989 to 10. age.2 presents interesting changes in household portfolio structures over time.6 percent in 1998). representing 39. 20 . The second largest asset in the households’ portfolios is VEHICLE (18. Table 2. The average number of children (NCHILD) living in the household declined from 0. This suggests that households have substituted ﬁnancial assets for nonﬁnancial assets.

9 percent.030 for renters.4 and 2. respectively.5 show the household portfolio composition in 1998 by household permanent income.5 percent of total assets) followed by ACCOUNT (26. the expenditure on housing declines after the age of 65. Tables 2. wealth and the age of the household head. renters spend more on housing than owners. For renters. 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. accounting for 57. however. age of the household head.000. The percentage of households who are homeowners increases with income. for renters. First. Among households with wealth below $250. it declines after age 50.0 percent). The housing expenditures of renters and homeowners also increase with income. For homeowners. The average housing expenditure is $7. Average housing expenditures for homeowners and renters are presented. For homeowners. VEHICLE is the third largest asset (7.000 and income below $50.4 shows the portfolio shares of assets that homeowners and renters hold. and the number of children.8 percent of total assets) following 21 . The ﬁrst row of Table 2. wealth and the number of children in the household. there are marked diﬀerences in household portfolios of renters and owners. VEHICLE is the most important asset held (41.The second column indicates the percentage of each of these groups that are homeowners. wealth. Since the primary residence is the largest part of homeowners’ wealth. It also increases with the number of children. in the remaining two columns of the table. reaching a peak among households with two children.042 for homeowners and $6.

while the housing share of portfolio declines. among homeowners that have wealth exceeding $1 million. For example. 42.2 percent).000.6 percent of total assets in housing. the share of the portfolio allocated to RESTATE and for all households. Several ﬁndings are worth noting.7 percent are homeowners. RETIRE and RESTATE are almost equal for renters and owners. 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.4 also presents the life cycle patterns in household portfolios. Also. but they hold only 42.7 percent are homeowners holding 75. For homeowners. in contrast. First.4. we observe striking diﬀerences in the composition of portfolios by the level of wealth. This suggests that households with heads over age 65 substitute 22 .3 and 2.RETIRE (10.2 percent of total assets while housing accounted for only 22. STOCK is the most important asset category with a share equal to 25.000. Of the households with income above $100. the portfolio share for ACCOUNT almost doubles both for homeowners and renters over the age of 65 compared to 50-64 year old group. 86. of the households with income below $15. Also. the fraction of households who are homeowners increases. portfolio composition of households with heads over the age of 65 diﬀers considerably from other age groups’ portfolios. as shown in Tables 2. Another noteworthy ﬁnding is that the portfolio shares for STOCK and RETIRE for both homeowners and renters rise with income. Table 2.9 percent of their total assets in housing. Not surprisingly. For higher levels of income.6 percent. For example. The portfolio shares for other assets such as STOCK.

and age groups. The portfolio share for owner-occupied housing increases with the number of children. Also. The table indicates a strong relation between children and the share of portfolio allocated to housing.5 looks at the link between children and shares of assets in both renters’ and homeowners’ portfolios. age and wealth are similar.liquid assets for nonﬁnancial assets. wealth.5 reveal striking diﬀerences in portfolio structures across income. but it stays steady after age 65. Homeowners invest a smaller share of their portfolio in interest-bearing accounts and stocks with an increase in the number of children. Table 2. the relative changes in portfolio shares of assets by income. Tables 2.5 shows the portfolio shares by the number of children living in the household.3 percent for those with three or more children. For example.9 percent for households with 2 children.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 table 2. The ﬁrst is their eﬀect on the choice of tenure. Second. the presence of children increases the share of the portfolio allocated to vehicles.4 and 2. Finally. 60. While portfolio composition diﬀers considerably between renters and homeowners. and the second is their eﬀect on asset shares of portfolios conditional upon ownership. and 65. The results indicate that the number of children living in the household aﬀects the portfolio shares for assets and 23 . Table 2. Children are likely to aﬀect the portfolio structures in two ways.0 percent of the wealth for households with no children. housing accounts for 56.

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

status and the gender of the household head and willingness to undertake risky investments (RISKY) may also aﬀect the household’s asset allocation. All variables that enter X are also included in Xc and Xh , with two exceptions. First, the marginal tax rate aﬀects the tenure choice and homeowners’ expenditure on housing since homeowners can claim tax deductions for mortgage interest payments and property taxes. However, the marginal tax rate is not expected to aﬀect the housing expenditure of renters. Thus, marginal tax rate is not included in Xc . Second, willingness to undertake risky investment does not enter Xc because it has an eﬀect on the tenure choice regarding the investment motive but not on the expenditures on rental housing. In addition, the vector Xh includes the race of the household head. Table 2.6 presents the estimates of the probit model of equation (2.9). The estimates of the homeownership equation are consistent with previous studies. As a household’s permanent income rises, the probability of homeownership increases. Age of the household head increases the probability of ownership until age 74. The coeﬃcients for WHITE and MARRIED are significant and positive, indicating that at the sample mean, households with white heads are 10.2 percent more likely to own than households with non-white heads, and those that are married are 26.1 percent more likely to own than those that are not. The coeﬃcients on the variables showing the number of children are positive and signiﬁcant. Households with one child are 6.3 percent, and those with two children are 10.8 percent, more likely to own relative to households with no children. The probability of owning starts to decrease 25

after the second child, household with three or more children are only 9.6 percent more likely to own relative to households with no child. The probability of being a homeowner also increases with the household’s marginal tax rate, suggesting that the tax-deductibility of property taxes and mortgage interest is more valuable at a higher marginal tax rate. Tables 2.7- 2.10 show the coeﬃcients and the standard errors for each of the seven asset equations and the housing expenditure equation for homeowners. Permanent income has signiﬁcant but small marginal eﬀects on the structure of homeowners’ portfolio. The share of the portfolio allocated to RETIRE, HOUSE and VEHICLE increase with income, while the share allocated to ACCOUNT, STOCK and RESTATE decreases with income. Higher levels of wealth are associated with higher shares in ACCOUNT, STOCK, RESTATE, OTHER, and lower shares in HOUSE and VEHICLE. The marginal eﬀect of wealth on the share allocated to STOCKS, HOUSE and RESTATE is large. A 10 percent increase in assets would increase the share of the average portfolio allocated to STOCK by 0.62 percentage point. A similar increase in assets would induce 1.25 percentage point decrease in HOUSE and 0.66 percentage point increase in RESTATE. Age is an important determinant of portfolio shares in a homeowner’s portfolio, and the results in Table 2.7 and 2.8 reveal a quadratic relationship in terms of age. Portfolio shares for RETIRE, HOUSE and RESTATE increase with age, reaching a peak at the age of 50, 63 and 50, respectively. Portfolio shares for ACCOUNT and STOCK, however, decrease with age until the age of 26

50 and 43, respectively. This relation between age and portfolio shares suggests that the structure of a household’s portfolio changes when the household head reaches middle age. For example, households headed by persons above the age of 45 start substituting liquid assets for nonﬁnancial assets such as HOUSE and RESTATE. The coeﬃcients on the number and age of children suggest that the presence of children plays a signiﬁcant role on the portfolio structure of homeowners’. Several results are of particular interest. First, relative to households with no children, households with one child have a 5.6 percent higher portfolio share of HOUSE, controlling for age and permanent income. Similarly, households with two and three or more children have 8.9 and 9.2 percent greater portfolio shares in HOUSE. Second, the portfolio shares for ACCOUNT, RETIRE, and VEHICLE decrease with an increase in the number of children. Controlling for the number of children, households with all the children older than age 13 hold a smaller portfolio share in HOUSE and a greater share in VEHICLE and RESTATE. Finally, homeowners that are willing to undertake risky investments hold a greater share of risky ﬁnancial assets, such as STOCKS and RETIRE, and a smaller share of less risky assets, such as ACCOUNT and HOUSE. All other things held constant, the portfolio shares allocated to ACCOUNT and RESTATE have declined in 1998. Households have substituted STOCK, RETIRE and VEHICLE for the other asset categories since 1995. An increase in the marginal tax rates leads to an increase in the portfolio share allocated 27

for example. the 1998 portfolio share for RETIRE is 5. should they choose to buy homes. The coeﬃcients on the selection terms in equations for ACCOUNT. 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.9 and 2. and the share for VEHICLE is signiﬁcantly higher for households with three or more children. STOCK. Since 1995. homeownership would not have the same eﬀect on renters. RESTATE and OTHER and a decrease in the share for ACCOUNT and VEHICLE. respectively. The estimates of the Mills ratios for renters are signiﬁcantly diﬀerent from zero 28 . while the portfolio share for ACCOUNT and STOCK decreases until the age 40 and 43. renters have shifted toward RETIRE in their portfolio. For these assets.11) for renters.10 report coeﬃcients of the selectivity variables. RETIRE and RESTATE. As renters have two or more children. An increase in total assets leads to an increase in the share for STOCK. The portfolio share for RETIRE increases with age until the age of 58. and a lower share for VEHICLE.to HOUSE and VEHICLE. RETIRE and HOUSE for homeowners are all statistically signiﬁcant. Selfselection occurred in households’ tenure choice. Tables 2. Compared to 1989. Tables 2. RESTATE and OTHER. the share for ACCOUNT decreases. The eﬀect of children is less pronounced for renters than for homeowners. More permanent income is associated with a higher share for ACCOUNT.0 percent higher in renters’ portfolio. It leads to a decrease in the share allocated to ACCOUNT.7-2.10 present the estimates of the equations (2.

After the second child. 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. 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. On the other hand. The last two columns in Tables 2. RETIRE. The age of the children in the household has no eﬀect on the housing expenditure of renters nor homeowners. the negative selectivity bias for renters’ implies the reverse: renters spend less on housing compared to average household of the sample had it chosen to rent. By a typical household.11 presents the estimates of shares for assets that a typical homeowner holds.10 present the estimates of the housing expenditure equation. and RESTATE.for ACCOUNT. Homeowners with one child have 11. For homeowners. having more children increases the housing expenditures of homeowners by only 3. all of the children in the household are younger 29 . For both renters and owners. I mean a household headed by a white married.2 percent. the expenditure on housing increases with the number of children. The housing expenditure of homeowners increases 8. Table 2.8 and 2. there were no signiﬁcant diﬀerences in the average behavior of the two groups prior to home purchase.9 percent higher housing expenditure than homeowners with no child. but the number of children has no eﬀect on renters’ expenditure. This implies that other than in regards to these three assets.3 percent with the second child.

First. 1992. and the share allocated to RETIRE becomes the second largest in the portfolio. children have two eﬀects on the portfolio structure of households. Using a 30 . an increase in the number of children increases the probability that a household owns a home. children change the demand for each asset.5 Conclusion Using the 1989. 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. At all ages. As mentioned above. conditional on the tenure choice. The portfolio shares of assets calculated in Table 2. Second. HOUSE is the most important asset. VEHICLE is the second most important asset in the portfolio when the household head is 30 years old.690) and has a 15 percent marginal tax rate. The household head is willing to take risky investments and holds mean wealth ($188. more is invested in RETIRE. The number of children has a negative eﬀect on the portfolio share for RETIRE. 1995 and 1998 SCF. The chapter examines the impact of children on the homeownership decision and the constraint of consumption demand for owner-occupied housing. As the household head reaches middle age. and its importance in the portfolio increase with the number of children living in the household. this chapter investigates how the number and the age of children living in the household inﬂuence the portfolio composition of households.11 include both of these eﬀects.than age 13.160) and permanent income ($46. 2.

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

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

664 6.97 48.9 0.75 0.27 0.815 258.328 206.58 0.054 49.28 0.151 203. Notes: 1) Tabulations are weighted using sample weights.12 0.900 0.158 0.684 92.59 0. 1989-1998.66 0.985 6.65 0.509 0.59 0.3 0.968 46.1: 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. permanent income and net worth.191 92.750 0.8 0.61 3.695 47.75 0.97 48.658 222. 33 .59 0.83 0.Table 2.28 0.64 0. 2) All dollar values are reported in 1998 dollars.525 101.97 Source: Survey of Consumer Finances.131 5.80 0.319 50. All variables are deﬁned in Appendix A.65 0. The text deﬁnes total assets.50 3.164 0.14 0.660 12.28 0.2.5 0.97 48.12 0.11 0.55 3.51 2.154 0.773 0.829 116.807 0.

047 0.067 0.068 0. STOCK.076 0.050 0.Table 2.043 0. and OTHER.094 0. 34 .186 0.057 0.053 0.072 0.432 0.130 0. RESTATE.059 0.059 0. 1989-1998.394 0. HOUSE.196 0. RETIRE.410 0.076 0. Notes: 1) Tabulations are weighted using sample weights.415 0.132 0.2: Mean Asset Shares by Year 1989 Portfolio Shares ACCOUNT STOCK RETIRE HOUSE VEHICLE RESTATE OTHER 1992 1995 1998 0.143 0.105 0. 2) The text deﬁnes the assets called ACCOUNT.043 0. VEHICLE.112 0.072 Source: Survey of Consumer Finances.197 0.208 0.

866 4.748 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 22.078 7.17 15.35 42. 35 .78 7.847 15.22 7.03 21.456 11.546 80.263 5.04 5.90 12.09 64.54 5.69 4.081 $30-50K 29.400 5.55 6.438 8.77 67.293 $15-30K 22.72 78.69 3.12 80.43 9.587 95.803 8.183 7.40 34.555 93.38 29.89 6.486 95.46 14.976 7.475 5.741 7.22 64.72 14.081 6.90 19.564 5.489 32.378 $50-100K 29. Notes: 1) Tabulations are weighted using sample weights.764 6.843 9.024 6.973 6.883 Above $100K 8.3: Expenditure on Housing.29 4.391 Source: Survey of Consumer Finances.08 22.72 3.42 78.16 12.677 6.79 64.24 86. 1998 Eh 1998 dollars %HH %HO HO RR All households 100 66.065 7.931 6.645 61.496 6.50 51.49 36. 1998.002 6.26 21.030 Income Below $15K 10.29 68.46 72.93 1. 2) HH represents all households. HO represents homeowners and RR represents renters.Table 2.195 5.042 6.28 9.

028 0.199 0.127 0.238 0.436 RESTATE HO RR 0.151 0.730 0.055 0.281 0.190 0.066 $50-100K 0.453 0.047 0.107 0.019 0.401 0.093 $15-30K 0.086 0.212 0.201 0.056 0.004 0.415 0.260 0.143 0.078 0.073 $250-1000K 0.049 0.092 0.089 0.293 0.028 0.490 0.759 0.089 0.031 0.087 0.062 Above $100K 0.027 0.069 0.015 0.587 0.086 0.122 0.091 0.147 0.080 0.059 0.061 0.082 Above 1000K 0.048 50-64 0.075 continued on the next page.102 0.021 0 0.183 0.049 0.077 0.007 0.071 0 0.047 0.374 0.252 0.226 0.445 0.083 0.011 0. .645 0.535 0.017 0.270 0.033 0.019 0.541 0.149 0.072 0.047 0.213 0.109 36 All households Income Below $15K 0.068 0.078 0.256 0.091 0.043 0 0.083 0.042 $50K-100K 0.101 0.010 0.234 0.205 0.389 0.172 0.075 Age Under 35 0.122 0.112 0.162 0.014 0 0.088 0.111 0 0.135 0.112 0.221 0.056 0.064 0.054 $100K-250K 0.091 0.064 0.413 0.694 0.135 0.132 0.359 0.097 0.018 0.181 0.032 0.111 0.165 0.Table 2.022 0.162 0.251 0.040 0.750 0.579 0 0.052 0 0.157 0. 1998 ACCOUNT STOCK RETIRE HOUSE VEHICLE HO RR HO RR HO RR HO RR HO RR 0.128 0.090 $30-50K 0.129 Wealth Below $50K 0.046 0.065 0.054 0.454 0.040 35-49 0.046 0 0 0 0 0 0.061 0.485 0.608 0.051 0.090 0.022 0.055 0.559 0.489 0.080 0.020 0.192 0.166 0.039 0 0.041 0.295 0.074 0.149 0.002 0.068 0 0.071 0.287 0.050 0 0.049 0.158 0.062 0.137 0.047 0.025 0.062 Above 65 0.4: Mean Asset Shares.630 0.

070 0.049 0.044 0. .195 0.085 0.040 0. Notes: 1) Tabulations are weighted using sample weights. VEHICLE.653 0 0 0 0 0.045 0.087 0. The text deﬁnes the assets called ACCOUNT. 1998.040 0.052 0.609 0.062 0. 3) HO represents homeowners and RR represents renters.5: Mean Asset Shares.089 0.288 0.032 0.044 0.098 0. HOUSE.102 0.200 0.019 0.560 0. RETIRE.048 0. 2) All dollar values are reported in 1998 dollars.061 0.115 0.512 Children CHILD0 CHILD1 CHILD2 CHILD3 37 Source: Survey of Consumer Finances.055 0.074 0. and RESTATE.088 0.044 0.098 0.026 0.495 0.038 0.122 0. 1998: Continued ACCOUNT STOCK RETIRE HOUSE VEHICLE HO RR HO RR HO RR HO RR HO RR RESTATE HO RR 0.110 0.471 0.069 0.117 0.577 0.373 0. STOCK.Table 2.038 0.222 0.087 0.

007 0. 2) Variables are deﬁned in Appendix A.053 0.Table 2.029 -0.044 ** 0.010 2.747 0.137 0.174 0.052 ** 0.108 0.341 0.579.004 ** 0.040 ** -0. 38 .261 0.047 ** 0.153 ** 0.085 0.052 0.034 ** 0.049 ** 0.080 0.6: Results from Probit Estimation HOMEOWN Coeﬃcient Standard Errors Marginal Eﬀects -4.304 0.041 * -0.096 0.046 0.030 ** 0.072 0. and * indicates signiﬁcance at 5 percent level.014 -0.137 ** 0.050 CONSTANT AGE AGE2 /100 MARRIED FEMALE CHILD1 CHILD2 CHILD3 CHAGE13 INCOME/10.063 0.2.118 0.000 MTR RISKY WHITE YEAR92 YEAR95 YEAR98 Notes: 1) ** indicates signiﬁcance at 1 percent level.102 -0.287 0.210 0.404 0.040 -0.005 ** 0.000 0.030 0.005 ** 0. The number of observations N=13.042 ** 0.193 0.143 0.

020 0.005 0.021 0.006 -0.032 0.006 0.092 0.004 ** MR:home -0.008 0.001 0.002 0.013 0.049 HOUSE Coef SE 1.001 -0.002 -0.031 * STOCK Coef SE -0.307 0.001 0.062 0.002 0.007 -0.026 0.061 0.012 0.008 0.010 0.003 0.006 0.398 0.007 -0.006 -0.004 0.002 -0. .008 -0.010 0.009 -0.004 -0.007 0.003 -0.029 0.056 0.003 ** YEAR98 -0.026 0.001 0.011 -0.002 0.016 0.006 0.004 0.013 0.009 0.005 CHILD1 -0.006 0.029 0.049 0.001 * MTR -0.054 RETIRE Coef SE -0.020 -0.003 0.001 0.020 0.002 0.006 -0.020 -0.455 0.011 0.005 0.007 -0.009 0.190 0.006 L INCOME -0.063 0.001 ** MARRIED -0.027 0.063 0.003 -0.001 -0.004 0.021 0.004 0.003 0.021 0.018 ** RISKY -0.007 0.003 ** YEAR92 -0.006 * CHILD2 -0.023 0.003 -0.013 0.198 0.001 0.005 0.001 ** AGE2 /100 0.007 0.005 0.007 0.056 0.063 0.027 0.009 0.067 0.004 0.004 0.002 0.115 0.001 0.003 -0.005 -0.004 0.112 0.003 -0.002 0.006 ** CHILD3 -0.031 0.024 0.006 -0.027 0.003 0.023 0.000 0.023 0.515 0.018 ** MR:+ wealth -0.008 0.007 -0.Table 2.007 0.039 VEHICLE Coef SE 0.054 ** AGE -0.010 0.002 -0.059 0.069 -0.000 0.006 0.010 0.033 0.009 0.005 0.087 0.007 0.125 0.003 -0.016 0.006 ** FEMALE 0.003 0.006 -0.024 0.007 ** CHAGE13 -0.024 0.077 0.003 ** YEAR95 -0.021 0.009 0.002 ** L ASSET 0.001 0.001 -0.004 0.021 0.7: Results: Asset Shares and Housing Expenditure of Homeowners ** ** ** ** ** ** ** ** 39 ** ** ** ** * * ** ** ** ** ** ** ** ** ** ** ** * ** ** ** * ** ** ** ** ** ** ** ** ** ** ** ** ** * ** ACCOUNT Coef SE CONSTANT 0.008 0.006 0.005 -0.022 0.089 0.008 0.432 0.005 0.013 0.005 0.003 0.010 ** * ** continued on the next page.007 -0.019 0.001 0.010 0.008 0.002 -0.037 0.012 0.008 0.006 0.

012 0.068 0.014 0.018 0.001 ** MARRIED -0.005 * YEAR95 0.004 -0.119 0.094 0.202 0.002 0. RETIRE.025 0.189 0.007 * L INCOME -0.006 0. .003 0. 2) The text deﬁnes the assets called ACCOUNT.177 0.002 ** MTR -0.003 0.005 YEAR98 -0.053 OTHER Coef SE -0.010 0.011 ** 0. and OTHER.007 0.005 -0.010 0. RESTATE.008 CHAGE13 0.025 0.234 0.307 0.120 ** ** ** ** ** RESTATE Coef SE CONSTANT -0.116 0.024 0.004 0.010 0.036 Notes: 1) ** indicates signiﬁcance at 1 percent level.005 -0.018 -0.001 0. VEHICLE.246 0.003 ** L ASSET 0.004 0.023 0.025 0.Table 2.004 0.008 CHILD2 -0.008 0.001 0. MR represents Mills Ratio.015 0.032 0.008 ** CHILD3 -0.003 -0.158 0.004 -0.220 0.043 0.021 0.000 0.008 0.052 0.008 0.002 0.002 -0.009 FEMALE -0.017 0. STOCK.004 -0.004 -0.009 ** CHILD1 -0.001 0. The number of observations N=10.001 0.001 -0.036 0.001 0.024 0.025 -0.017 0.002 ** 2 AGE /100 -0.004 0.005 -0.002.2.002 0.584 0.204 0.007 ** * * 1.006 -0.080 ** AGE 0.019 0.002 0.181 0.005 ** MR:home -0.568 0.393 -0. All variables are deﬁned in Appendix A.004 0.018 0.004 0.8: Homeowners: Continued ** ** ** ** ** ** ** ** ** 40 log Eh Coef SE * -0.005 YEAR92 0.023 0.049 -0.015 -0.017 0.025 MR: + wealth 0.066 0.025 ** RISKY -0. HOUSE. and * indicates signiﬁcance at 5 percent level.503 0.015 0.

019 0.020 0.079 * RISKY 0.005 0.001 0.020 -0.021 ** CHAGE13 -0.013 * CHILD1 -0.130 0.009 0.072 0.014 0.033 0.018 0.010 0.026 -0.022 L INCOME 0.030 0.001 0.015 0.Table 2.173 AGE -0.037 RETIRE Coef SE ** -0.154 ** 0.017 0.005 0.008 0.004 0.014 MR:home -0. .015 * YEAR98 0.012 0.014 0.024 0.007 0.120 0.004 ** MTR 0.079 0.031 0.004 0.022 0.006 0.003 0.204 0.033 0.015 0.070 0.028 0.026 0.018 0.086 0.007 0.051 0.002 0.285 0.002 ** 0.001 0.054 0.381 0.011 0.025 0.017 CHILD2 -0.001 0.008 -0.001 0.019 0.032 0.029 0.002 0.005 0.013 0.004 -0.014 ** 0.038 0.007 0.319 0.034 0.048 -0.003 ** AGE2 /100 0.109 0.074 0.019 0.026 -0.016 0.023 0.006 -0.003 0.9: Results: Asset Shares and Housing Expenditure of Renters ** ** ** ** ** ** ** * ** ** ** ** ** ** * ** ** ** 41 ACCOUNT Coef SE CONSTANT 0.011 0.097 -0.068 0.015 -0.014 0.014 YEAR95 -0.017 0.035 0.029 0.003 0.008 0.014 0.015 -0.010 0.059 0.039 0.077 0.035 VEHICLE Coef SE 2.000 0.014 ** L ASSET -0.053 ** continued on the next page.008 -0.064 ** 0.014 0.019 0.027 0.010 0.243 -0.021 ** FEMALE 0.089 0.017 0.015 0.059 0.038 * MR:+ wealth 0.011 ** 0.061 0.015 0.023 0.021 0.027 0.039 STOCK Coef SE -0.019 0.050 0.103 -0.080 0.793 0.001 -0.011 -0.019 ** CHILD3 -0.000 0.002 ** MARRIED -0.010 0.013 0.002 ** -0.019 -0.012 YEAR92 -0.012 0.052 0.243 0.

014 -0.014 0.004 -0.011 0.004 0.017 0.083 0. .038 0.2.038 0.020 0.018 0.054 MTR -0.010 * YEAR98 -0.Table 2.005 0.005 0.173 0.014 -0.004 0.067 0.021 0.315 0.061 0.109 0.125 -0.064 0.002 2 AGE /100 -0. The number of observations N=3.577.000 0.020 0. RESTATE.014 -0.045 0.011 0.022 0.020 0.001 0.014 -0.285 -0.030 0.011 -0.009 YEAR92 -0.005 0.038 0.011 CHILD2 -0.365 0.029 0.027 0.009 * YEAR95 -0.062 0.004 0.580 0.003 ** L ASSET -0. All variables are deﬁned in Appendix A.022 0.334 0.030 0.001 0.006 ** ** RESTATE Coef SE CONSTANT -0.001 0.008 RISKY 0.003 -0.010 0.037 0.020 -0.015 FEMALE -0.014 0.002 -0.012 0.102 0. HOUSE.038 ** Notes: 1) ** indicates signiﬁcance at 1 percent level and * indicates signiﬁcance at 5 percent level.035 0.110 0. VEHICLE.036 0.014 0.004 0.012 0.005 ** -0.032 0.030 0.033 -0. RETIRE.012 CHILD3 -0.073 * ** ** ** OTHER Coef SE 0.035 -0.010 CHILD1 0.001 0.118 0.002 0. and OTHER.030 0.010 L INCOME 0.073 ** 0.017 0.001 0.069 0.044 0.002 * MARRIED 0.033 ** MR: + wealth -0. MR represents Mills Ratio.024 MR: home 0.130 * AGE 0.10: Renters: Continued ** ** 42 log Eh Coef SE 4.042 0. STOCK.016 0.365 -0.189 0.014 CHAGE13 -0.017 0.007 0.001 0. 2) The text deﬁnes the assets called ACCOUNT.003 -0.

089 0.594 0.058 0.033 0.088 0. STOCK.038 0.Table 2. RETIRE.047 0.093 0.030 CHILD2 CHILD3 0.055 0.122 0.100 0.043 0.642 0.096 0.105 0.047 0.049 0.055 0.043 0.120 0.094 0. 43 . HOUSE.043 0.061 0.048 0.086 0.053 Notes: The text deﬁnes the assets called ACCOUNT.049 0.534 0.057 0.103 0.037 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 0.617 0.102 0.036 0.141 0.602 0.053 0.112 0.607 0.099 0. VEHICLE.101 0.064 0.132 0.056 0.650 0.590 0.063 0.128 0.552 0.038 0.054 0.047 0.095 0.036 0.611 0.044 0. and RESTATE.070 0.079 0.577 0.626 0.090 0.064 0.058 0.043 CHILD1 0.040 0.111 0.044 0.056 0.114 0.049 0.023 0.

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

ignoring the eﬀect of uncertainty on household composition. [10] for the details. and. 3 45 . Furthermore. given precautionary and other motives. [10] suggest that the mixed results might be due to the diﬃculties in empirically testing for precautionary saving.3 One problem that has not been mentioned in the literature is that all of these empirical models try to explain the eﬀect of income uncertainty on household savings. precautionary motives. ﬁnally. household income or the age of the head might aﬀect household saving and fertility simultaneously. fertility might be aﬀected by uncertainty or income ﬂuctuations. this chapter extends the empirical work on precautionary saving. This chapter takes account of the fact that children are endogenous along with the The problems include proxying certainty. the precautionary motive includes saving to protect the well-being of children against income ﬂuctuations. the life-cycle motive includes saving for children’s education. By examining the implications of uncertainty on the fertility decisions of households and incorporating fertility decisions into household saving decisions. See Browning and Lusardi [6] and Carroll et al. It seems reasonable that these motives are aﬀected by the presence of children. [12] and Lusardi [44] ﬁnd more support for the precautionary motive. that is. Yet the causal eﬀect might go in the opposite direction.tle or no evidence for precautionary motive. and incorporating the restrictions of the theoretical model. Most of a household’s saving motives can be grouped into one of three categories: life-cycle motives. the bequest motive includes saving to leave assets to children. ﬁnding an appropriate instrument. For example. and bequest motives. Browning and Lusardi [6] and Carroll et al. whereas Carroll and Samwick [11].

saving for retirement peaking between age 51 and 60. namely. the eﬀect of income uncertainty on fertility over the life-cycle. buying a home and education of childrenas the most important reasons for saving in the 1983 SCF (data come from the panel of 1983-89 SCF and is discussed at length in section 3. When disaggregated into age groups. with 18 percent. saving for a home purchase peaking below age 31. respectively.1 percent. The second most frequent reason was saving for retirement. More than 32 percent reported that ‘rainy days’ were an important motivation for saving. retirement. and saving for the education of children peaking between age 31-40.4 For example. Wolpin [57] estimates a dynamic stochastic model of fertility within 4 See Hotz et al.7 and 4. 46 . The proportion of households citing saving for children’s educational expenses and home purchase were 5. Table 3.1 presents the proportion of households citing the following motives -‘rainy’ days.saving behavior when estimating the eﬀect of children on savings. all of the four reasons reveal a hump shape: saving for ‘rainy days’ peaking in the 41-50 age group. The most frequently reported reason for saving was to increase resources for ‘rainy days’ such as unemployment and unexpected needs.3). [30] for a survey of life-cycle fertility models. This suggests that the relative importance of saving for each motive depends highly on the composition and the life-cycle stage of the household. Most life-cycle fertility models incorporate some types of uncertainty. This chapter also addresses a neglected topic in the childbearing literature.

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

household savings. The results show that having a child appears to reduce savings of households with young heads and to increase savings of those with middle-aged heads. The remainder of this chapter is organized as follows. Section 3.2 examines both the theoretical and the empirical model. Section 3.3 describes the data set and the variables used in the empirical work. The empirical results are reported in Section 3.4, and a summary of the ﬁndings with conclusions are provided in Section 3.5.

3.2

**The Relationship between Fertility and Saving
**

Households are assumed to maximize a lifetime utility function that is

additively separable over time. The utility of household i at age t depends on the number of children, Mit , and a composite consumption good, Cit :

T

U=

t=0

β t U (Mit , Cit )

(3.1)

where β is the discount factor and T is the time of death. The household faces two decisions at each period: whether to have a child, and how much to consume. If parents give birth to a child at age t, then ∆CHILDit = 1, and = 0 otherwise. The number of children at age t, Mit , is the sum of all births until age t. The household is able to borrow and lend across time periods at a real interest rate. Savings at age t, Sit , depend on the household income, the cost of consumption good, and the cost of children. The household income is assumed 48

to be stochastic. Thus the household faces uncertainty about future income. Depending on the utility function, income uncertainty can aﬀect the fertility and consumption decisions of the household. This utility maximization problem, in general, is intractable and does not deliver closed-form solutions without imposing structural assumptions concerning the utility function. This makes deriving testable implications impossible, even for a two-period model. The construction of the model, however, shows how fertility and saving decisions can be determined simultaneously. The lack of testable implications from the theoretical model allows me to examine a general form of saving and fertility behavior. For the empirical speciﬁcation, I assume that the level of savings of a household i at time t, (Sit ), is a linear function of the variability of the household’s income (Φit ), birth of

s a child (∆CHILDit ), and a set of observable variables (Xit ) that measure s the life-cycle stage of the household. The matrix Xit includes the number of

children living in the household, permanent and transitory income and other household demographics. Permanent income is deﬁned as the expected income for year t conditional on the demographics of the household, and transitory income is deﬁned as the diﬀerence between realized and expected income for year t. Savings of a household i at time t can be thus represented as:

s Sit = γ0 + Φit γ1 + ∆CHILDit γ2 + Xit γ3 + u1it

(3.2)

where γ0 , γ1 , γ2 and γ3 are the parameters to be estimated, and u1it is an error term representing unobservable variables. 49

The precautionary saving model predicts that saving is increased by a combination of a positive third derivative of the utility function and uncertainty about the future income. Therefore, a positive value for γ1 is implied by a utility function with a positive third derivative (as with constant absolute risk aversion (CARA) or constant relative risk aversion (CRRA) utility functions). For a quadratic utility function (for which the third derivative is zero), saving behavior does not respond to income variability, and in this case, γ1 should be zero. The life-cycle model suggests that a household that gives birth to a child at time t saves less (due to an increase in necessary consumption). Households with younger heads may save even less with an additional child because their current (expected) income is less than the annuity value of their lifetime income, and the diﬀerence between their income and expenditure is even greater. Such a model suggests γ2 should be negative, and the coeﬃcient of the interaction of ∆CHILDit with the age of the household head should be positive. The childbearing decision of a fecund household is speciﬁed as a function of Φit and a set of household speciﬁc variables that aﬀect the preferences

c for a child, Xit . A household is considered to be fecund if the wife is younger

than age 49 or if the head of the household is a female younger than age 49. The decision to have an additional child is represented as

c ∗ ∆CHILDit = η0 + Φit η1 + Xit η2 + u2it

(3.3)

50

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

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

and 1985 are drawn from the 1986 wave of SCF which was conducted with a large subset of 1983 respondents using a shorter questionnaire. 1984. education. I kept the value of the primary residence constant. ‘In [the preceding calendar year] how much was the total income you (and your family living here) received from all sources. I deﬁne two measures of income uncertainty. I regress log income on age. household demographic variables and age-interaction terms. before taxes and other deductions were made?’ Income of the households for 1983. To remove the predictable component of income growth. All values are converted to 1989 dollars using the Consumer Price Index Research Series Using Current Methods(CPI-U-RS). 1987 and 1988 are drawn from the 1983-1989 panel. 822 were reinterviewed in 1986 using a shorter questionnaire. 8 9 Income uncertainty at- Of the 4. 9 The income measure includes both capital and non-capital income.The inconsistency seems to be lower for home purchases (Kennickell and StarrMcCluer [38]). Using the panel dimension of income observations in the data. The precautionary saving model predicts that income risk regarding capital income might have a diﬀerent eﬀect 53 . dummies representing asset holdings in 1983. I adjusted SAVE1 as follows to obtain a measure called SAVE2: whenever a household did not buy or sell a house that was the family’s primary residence. year dummies. 1986. The ﬁrst measure assumes that households have knowledge about their future income and expect their income to change over time as household characteristics change.8 Income values for 1982. 2. The income measure comes from the question. To exclude the capital gains. 103 households in the 1983 SCF.

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

000 is somewhat arbitrary. Of the remaining 1.to exclude for identiﬁcation is problematic.2 illustrates the composition of the sample in detail. this exclusion or a similar one is necessary when working with means which are aﬀected by outliers.479 experienced a major change in family composition and were dropped from the sample.1. separation or the death of either head or spouse are excluded. 299 households out of 1. 035 households with the heads between the age of 22 and 88 in 1983. A household is only included in the analysis if it remained intact between 1983 and 1989 (i..180 households.) This eliminates the income variability or net worth change caused by family separation or family creation. 13 The sample design in 1983 speciﬁcally excluded households with the heads under the age of 22. In the panel 1983-89 SCF. All variables are described in detail in Appendix B. those households with more than three missing or non-positive income values are dropped. divorce. The sample selection criteria for the sample are as follows. The variable ∆CHILD indiThe cut-oﬀ net worth of $10 million and saving of $600. See Kennickell and Starr-McCluer [37] for details.12 To calculate an accurate measure of income uncertainty. Therefore. 84 were dropped because of outlying net worth or saving values and 66 were dropped because of missing income values.e. I use VRL and VRLI without an instrumental variable estimator. 000. However. households that experienced a change in composition such as marriage. The ﬁnal sample consists of 1.13 Table 3. 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. 12 55 .

respectively.2 provides the variable means by household fertility of the fecund households. 18. Columns (3) and (4) of Table 3. and saved more compared to the other households in the sample.with and without an additional child . I use a probit model and a dummy variable to indicate the fertility choice instead of using a count data model. The average net worth for households with an additional child is $82.e. Therefore.611 in 1983.6 percent of the fecund households had a child between 1983 and 1989. comparisons across the two groups of households . Fecund households are headed by younger persons.14 I refer to the households that had a child as households with an additional child. Among fecund households. which is $37.179 less than the mean net worth of the rest of the fecund houseOnly 3.0 percent had three.3 percent of the families experienced more than one birth during that time period-2.1 percent).cates the fertility of the household between 1983 and 1989. According to the SCF data. mostly married (89. have higher expected income and have a higher number of young (0-6 years old) children in 1983. i. had less net worth in 1983. but had higher income between 1983 and 1989. fecund households are faced with higher income uncertainty than the rest of the sample. Most of the diﬀerences in net worth and saving between the two groups can be attributed to the fact that these two groups are at diﬀerent stages of their life cycles.3 percent had two children and 1. Columns (1) and (2) provide the variable means and standard deviations of all of the households in the sample and the fecund households. 14 56 . Also. ∆CHILD = 1 if the household experienced at least one birth of a child.are plausible: households with an additional child are younger..

respectively. they saved $11. from 67.132 versus 0. we observe that households who had a child are faced with lower income uncertainty (0.0 percent in 1983 to 72.7 percent in 1983 and rose to 77.191). 000 and above $60. 648 and $6. Uncertainty estimates are greater for households with mean income below $10.8 percent in 1989. the increase is insigniﬁcant. The homeownership proportion for the rest of the fecund sample is higher in 1983 but compared to the households with an additional child. households with an additional child saved more than the rest of the fecund sample. 170 and $8.3.5 in 1989. 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. The homeownership proportion among households with an additional child was 53. The measures of income uncertainty by household characteristics are given in Table 3. On the other hand. the bottom 25 percent of the distribution faces a lower income variability than the households in the 25-50 percent of 57 . 462. Also. 000. Households in the bottom 25 and top 10 percent of the SAVE2 distribution face higher income variability than the rest of sample.holds. The remarkable diﬀerence in the housing tenure choice of the two groups shows the link between the decisions of having a child and purchasing a house. when we compare the income uncertainty of the two groups. while fecund households without an additional child saved $7. This suggests that households at the tails of the income distribution face higher uncertainty. When households are grouped by SAVE1. 690. According to SAVE1 and SAVE2.

For other SAVE1 groups. versus 16 percent of the households with heads between age 31-40. 0 otherwise. Considering the income uncertainty. 3. and their permanent income is higher.4 Estimation and Results Table 3. for whom it reaches its highest value. When grouped according to the number of children. Diﬀerence between the savings of households with and without an additional child increase as the age of the household head increases. Households that had a child save more. Table 3. regardless of the uncertainty measure. the estimates of income uncertainty decrease as the number of children living in household in 1983 increases. income and income uncertainty by childbearing decisions and the age of the household head. households with young and middle age heads that had a child face lower income variability. 58 .4 represents household saving. income and income variability. Households who had a child between 1983-89 are diﬀerent from other households in terms of their saving. The dependent variable is ∆CHILD = 1 if the household had a child between 1983-89.5 shows the results of the probit analysis of the fertility de- cision of the fecund sample. income uncertainty is lower except the top 10 percent of the distribution. Almost 36 percent of the households with heads below age 31 in 1983 had a child during the following six year period. The right-hand variables include factors that are expected to aﬀect the demand for a child. and 1 percent among the age 40 and above group.the SAVE1 distribution. regardless of how savings were measured.

Evaluated at the sample mean values. 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. column (2) uses VLI and mean income and ﬁnally. The signs of the age interaction terms imply that older homeowners are less likely to have a child. The coeﬃcient of age is highly signiﬁcant and negative. A married household is 8 to 10 percent more 59 . The probability of having another child is lower for a household that has a full-time working spouse or that is headed by a white person. a household income measure (MEANINC. PERMINC and TRANSINC). respectively. The analysis in column (1) uses VRLI as the income uncertainty measure and permanent and transitory income as the income measures. marital status (MARRIED). middle (MIDDCH) and older (HIGHSCH) children in 1983 and the interaction terms for age (AGE83×HOWN83 and AGE×YOUNGCH).5 show that other things being equal. The results in table 3.1 increase in VRLI and VRL decreases the probability of having a child by 0. an income risk measure (VRLI and VLI). homeownership in 1983 (HOWN83).5 and 0. indicating that being one year older reduces the probability of having another child by 1 percent. age (AGE). column (3) uses VRLI and mean income. a 0. number of adults living in the household (NADULT).namely. a dummy indicating whether spouse works full time at paid employment in 1983 (SPFULLT). race of the household head (WHITE).6 percent. whereas older households with small children are more likely to experience another birth. number of young (YOUNGCH).

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

Both SAVE1 and SAVE2 reduce with the number of adults living in the household. Income uncertainty reduces savings of the households in the top 10 percent and bottom 25 percent of the wealth distribution and does not aﬀect the rest of the population.6 and Table 3. households in the top 10 percent of the wealth distribution save almost $11.7 do not the support the idea that households save a higher fraction of transitory income.24 in column (1) of Table 3.34.6 and SAVE 2 in Table 3. evaluated at the sample average of VRLI.6. The results in Table 3.The results for two measures of savings are quite similar (SAVE1 in Table 3. around $7. Saving also increases with income. which is 0. respectively. let us look at the eﬀect of the number of adults living in the household.000 more than the rest of the sample. However.162 save about $15. The estimated coeﬃcient of the propensity to save out of transitory income is 0.132-$8. which is 0. Before we examine the eﬀect of children on savings.7). regardless of the measure.500 less than the rest of the population whereas households in the bottom 25 percent of the wealth distribution save $3. the results in Table 3.447.6 show that households in the top 10 percent of the wealth distribution and with VRLI of 0. Changes in the number of adults between 1983 61 .162. For example.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. Having 1983 net worth in the top 10 percent is associated with higher levels of SAVE1 and SAVE2 in all speciﬁcations.

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.7. That is another impact of children on household savings. however.796 more) than household that do not expect to leave a bequest. do not aﬀect SAVE1 but appear to reduce SAVE2.and 1989. This result highlights the importance of the interaction between household composition and the age of the household head. 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. and the fertility decision is modeled as an endoge- 62 . For this.555-$12. When we control for permanent income as in column (1) of Tables 3.6 and 3. Also. the sample is restricted to only fecund households. households expecting to leave a bequest save signiﬁcantly more (around $12. age does not aﬀect the savings behavior of those without children. The same is true for the number of children living in the household. Households with children save less when the household head is below age 35 and save more above that age. Controlling for the number of children already living in the household. Having an additional child reduces savings. we observe that the eﬀects of the children and age interaction terms decrease but do not disappear. however being one year older and having an additional child increases savings.

nous switching model. I take into account the fact that fertility decisions are endogenous to household saving decisions.15 The results are given in Table 3. Overall.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. The results show that households would have saved around $2. The direction of the response.066 less if they had chosen to have a child. 3. This ﬁnding suggests that the overall eﬀect of children on household saving is negative. implying that younger households save less whereas older 15 See Maddala [45] for the models with self-selectivity. The empirical results suggest that income uncertainty directly aﬀects the probability of having a child. depends on the age of the household head. 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. changes in the number of children and children already living in the household reveal a signiﬁcant eﬀect on household savings. Finally.695-13.133 according to the results of the three regressions in Tables 3. even after controlling for several demographic characteristics. however.6.8. 63 .297-4. average SAVE1 of the households that did not have a child is around $12. In estimating this eﬀect.

At the same time. 64 . the age eﬀect on savings disappears. The main ﬁnding of this chapter is consistent with the life-cycle theory of saving and consumption. 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. Household composition is an important factor of life-cycle savings.households save more with an increase in the number of children.

345 0. 65 .052 0.011 0.1: Saving Motives by Age Groups.111 0.016 0.192 0.004 0.057 0.250 0.S. 1983-1989. Notes: The table reports the proportion of households citing the selected motives as the most important reason for saving as ‘rainy days’. buying home and education of children respectively. population as a whole.206 0.383 0.176 0.000 Source: Survey of Consumer Finances.326 0.017 0.323 0.010 0.065 0.117 0.047 0.047 0.289 0. 1983 All By Age Below 31 31-40 41-50 51-60 61-70 70 and over Rainy Days Retirement Home 0. retirement.230 0.362 0. Number of observations: 1035.Table 3.041 Children 0. Observations are weighted to reﬂect the U.122 0.000 0.273 0.

9 0.537 0.372 0.788 0.055 0.189 38.795 0.670 0.Table 3. The table reports means of the variables.725 0.162 0.1.001 0.407 0.652 0.767 1.4 13.8 12.120 0.191 0.169 Fecund HH ∆CHILD = 0 8282 7648 6868 6462 43109 44122 40171 39921 112861 119790 36.289 0. All dollar values are in 1989 dollars.4 0.891 0.334 0.186 2.624 0.1 12.780 0.092 2.197 ∆CHILD = 1 11170 8690 38852 41210 82611 30.112 2.747 0.180 0.845 0.516 2.537 0.135 0.487 0.1 0. Observations are weighted using the sample weights.246 0.6 13.556 0.7 0.725 0.645 0.778 0.672 0.302 0.456 0.2: Descriptive Statistics by Household Fertility Decision SAVE1 SAVE2 MEANINC PERMINC NWORTH AGE EDUC WHITE MARRIED NCHILD YOUNGCH MIDDCH HIGHSCH ∆CHILD NADULT BEQUEST HOWN83 HOWN89 VRLI VLI All HH 7699 6080 37668 36339 140628 45.460 0.938 0.132 0.424 0.490 0.151 N 1035 509 422 87 Note: ∆CHILD=1 if the household had a child between 1983 and 1989 (0 otherwise). All variables are described in Appendix B.297 0. 66 .791 1.437 0.734 0.

0 0.492 15.2642) $30.7 0.446 10.489 25.1794) Above $30.6504) $10.2299 0.2330 (0.2391 (0.726.0 0.5537) $ 1.056 25.1027 0.433) 0.2371) $1.1088 (0.5066) 1 Child 17.5530) NCHILD No Children 55.3279) SAVE1 Below (-$1.2740) (0.0902 (0.999 37.0 0.000-29.169 (0.3234 (0.5245) 0.0 0.2579) $7.3334) $52.0 0.1269 (0.0 0.2920 0.0 0.233-12.1095 0.126-24.0 0. All variables are deﬁned in Appendix B.6786) (0.000 12.490-7.4472) (0.2117 (0.1832 (0.1363 (0.4232) $10.000 14.3333) (0.7 0.446 15.492 10.3: Mean Income Uncertainty by Household Demographics % HH VRLI All 100 0.1803 0.0977 (0.2 0.4940) (0.1194 (0.9431) (0.5512) SAVE2 Below (-$739) 25.2086) Above $314.999 36.9087) NWORTH Below $10.818 10.2134 0.Table 3.265 25.4963) 0.057-30.1559 0.2171) 2 and more 27.1912 0.0998 0.3230) $127.3524) (0.078) 25.3362 0.1296 (0.1.2657) Above $60.1716 (0.2210) (0.1462 (0.4780) $ 10.1855 (0. 67 .4881) (0.1889 (0.2973) Note: Standard deviations are given in parentheses.818 15.1312 (0.1527 (0.6129) (-$739)-1.1 0. VRLI is the variance of residual log income.1184 0.0 0.2290 0.125 25.1330 0.2738) (0.2825) (0.1808) (0.0 0.0 0.078)-1.4092) (0.1715 (0.162 (0.3376) VLI 0.1436 0.2269) (0.2374 (0.518-314. Observations are weighted using the sample weights (N=1305).2449) (0.265-52.1 0.0 0.1707 (0.2013 0.1284 (0.10.2 0.7517 25.426) MEANINC Below $10.6357) (0.1451 0.0988 (0.0 0.1056 0.1996) (0.232 25. and VLI is the variance of log income.2458) 0.0 0.0 0.0 0.1468 0.3980) Above $24.000-59.725 25.2281 (0.2713 (0.5836) (0.2274) (-$1.1479 (0.

All variables are deﬁned in Appendix B.628 0.528 4. 68 .812 6.422 0. VRLI is the variance of residual log income.3 8.331 23.0812 0.4: Savings. and VLI is the variance of log income.1774 0.8 10.049 5.1408 0.2376 VLI 0.2261 Note: ∆CHILD=1 if household had a child between 1983-1989 (0 otherwise).899 0.1.1727 3.272 9.220 34.1507 20.477 40.3064 0.2920 6.1 4.619 3.487 0.9 11.390 52.636 27.Table 3.1839 0.884 36.912 0.5 4.769 0.5 24.0841 56.257 43. 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 12.1369 0.

369 [-0.073 SPFULLT -0.134 0.565 1.31 0.418 0.166** 0.1037] [-0.0001] [ 0.060 [-0.0095] [-.420 YAGE 0.000 0.024** 0.047 [-0.369 -0.366 -0.627** 0.1038] [-0.1040] [-0.0541] -0.564 HOWN83 2.001* [ 0.448 0.021** -0.20 Pseudo R2 0.331 HIGHSCH -0. Number of observations N=509.0426] -0.953** 0.049 Likelihood -152.980 -0.001 1.024** Note: Coef reports coeﬃcients and StdE reports standard errors.545 0.047 -0.006 TRANSINC/1000 -0.068 YOUNGCH -1.Table 3.020** -0.410 0.024** 0.14 0.31 0. .203** (1) Coef StdE 1.543 0.0786] [-0.0829] [-0.0594] 69 CONSTANT AGE VLRI VLI PERMINC/1000 0.232 HAGE -0.844 MIDDCH -0.019** 0.027** 0.3338] [-0.384** 0.154** 0.001 MEANINC/1000 MARRIED 1. and HAGE is HOWN83×AGE.0625] -0.130 0.0920] 1.225** 0.627** 0.409 0.720* -0.186** [-.749** -0.228 WHITE -0.060 -160.768 0.175** 0.001** 0.154** 0. ** indicates signiﬁcance at 5 percent level.998 -0.0094] [-.060 -2.0845] [-0.886** 0. YAGE is YOUNGCH×AGE.0577] (3) Coef StdE 1.385** 0.368 -0.2375] -2.132** 0.3340] [-0.389 0.000* 0.229 -0.5: Probit: Fertility Decision of Fecund Households (2) Coef StdE 1.130** 0.063 0.0001] [ 0.001 1.0099] [-.019** 0. and * indicates signiﬁcance at 10 percent level.077 0.623** 0.566 [-0.00 0.0675] -0.357 0.886** 0.208** 0.062 -160.225** [-.0612] [0.35 0.063 0.0787] [-0.0613] 0.0008] [-.717* -0.130** 0.175** 0.1297] [ 0.0553] [-0. Marginal eﬀects are given in the brackets.1041] [-0.0844] [-0.178** 0.208** 0.131 0.236 [-0.397 0.392** 0.0550] [-0.020** [-.714 NADULTS 0.

035. and * indicates signiﬁcance at 10 percent level.22 -21218 5702 ** -63955 26900 ** -131 306 -131 305 -185235 83042 ** -186203 83131 ** 6412 2952 ** 6474 2950 ** CONSTANT VRLI VRL NWORTH25 NWORTH90 VRLI× NWORTH25 VRLI× NWORTH90 VLI× NWORHT25 VLI× NWORHT90 AGE ∆CHILD AGE ×∆CHILD PERMINC TRANSINC/1000 MEANINC/1000 NADULTS NCHILD AGE× NCHILD BEQUEST83 ∆ NADULT R2 255 53 ** -7132 3916 ** -24479 11818 ** 698 319 ** 12916 5780 ** -7860 5120 * . .6: Regressions of SAVE1 on Income Uncertainty with Endogenous Fertility Decision (1) Coef StdE 19212 19254 2250 2252 343 3520 26829 12463 ** -21824 6015 ** -71146 29321 ** 2180 2441 -500 3222 36903 11508 ** -464 3230 37290 11447 ** -22195 5914 ** -71517 28439 ** (2) Coef StdE 15228 19373 (3) Coef StdE 15240 19296 2258 2365 70 -208 294 -134139 93086 4256 3304 343 102 ** 240 59 ** -7554 3838 ** -22542 11934 * 646 320 ** 12654 5751 ** -7664 5177 . Number of observations=1.22 257 53 -7244 3908 -24818 11791 707 319 12952 5786 -7845 5112 .Table 3. ** indicates signiﬁcance at 5 percent level.22 ** ** ** ** ** Note: Coef reports coeﬃcients and StdE reports standard errors.

035. Number of observations=1. ** indicates signiﬁcance at 5 percent level.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 . .18 223 57 -8264 3929 -24089 11699 686 319 11736 5772 -10074 5321 .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 * .Table 3.18 Note: Coef reports coeﬃcients and StdE reports standard errors. and * indicates signiﬁcance at 10 percent level.

Table 3.695 12.133 12. 72 .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) 13.154 10.527 10.672 8.375 422 422 422 Notes: E(SAVE1|∆CHILD=0) denotes average SAVE1 of the households that did not have a child between 1983-1989 and E(SAVE1|∆CHILD=1) denotes average SAVE1 of the households had they chosen to have a child.

000) it was 98 percent (Presley and Clery [47]).1 Introduction The purpose of this chapter is to analyze an important life-cycle saving motive: saving for children’s college education. While the percentage was lower for those in the lower income group (income below $35. Of those contributing 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.Chapter 4 Saving for Children’s College Education 4. parents contribute a signiﬁcant amount to their children’s college costs. Using the 1983-86 SCF. According to the 1996 National Postsecondary Student Aid Survey (NPSAS). and 80 percent reported using some current income. 90 percent of dependent undergraduate’s parents contributed to their children’s college costs. and the average amount of their support was about $3. Gale and Scholz [23] estimate that the annual ﬂow of parental 73 . for those in the higher income group (income above $70. According to the 1987 NPSAS.000).900 (Choy and Henke [14]). about 65 percent reported using some previous savings. 65 percent of the parents contributed a positive amount to their children’s college costs as a gift. First.

Dick and Edlin [16] use data on ﬁnancial aid awards to calculate a marginal tax rate and ﬁnd that families with children attending average-priced colleges face a ﬁnancial aid tax ranging from 2 percent to 16 percent. the ﬁnancial aid tax rate on capital income can be as high as 50 percent. Second. contributions to children’s education yield a wealth of $1. as shown in Long [43]. According to Edlin [19] and Feldstein [22]. anticipated college costs and the amount of aid that is received and so on.contributions totaled about $35 billion. The college ﬁnancial aid system imposes an implicit tax on the savings of households that are potentially eligible for ﬁnancial assistance. Edlin [19]. the results in Edlin [19] and Feldstein [22] depend on a variety of assumptions such as the number of children enrolled in college. Using the data on actual expenditures on children’s college education. this chapter examines the eﬀect of anticipated educational expenses on household savings. Gale and Scholz [23] convert the ﬂow of college support to a stock of wealth using steady-state assumptions. Long [43] ﬁnds that the eﬀect of the ﬁnancial aid tax on asset holdings is smaller than the eﬀect in the prior literature. the focus has been on calculating the ﬁnancial aid tax and measuring its negative impact on household asset accumulation. To date. families who save for college reduce their eligibility for ﬁnancial aid. 74 . According to their estimation. Dick and Edlin [16] and Long [43] have recently examined the adverse eﬀect of the means-tested student aid process on household asset accumulation. which is 12 percent of the aggregate net worth in 1983.441. Using alternate but also plausible assumptions.5 billion. However. Feldstein [22].

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

The results of their analysis show that retirement and precautionary motives account for 25.2 In addition. A number of studies have analyzed motives for saving such as saving for retirement. Their ﬁndings also show that the importance of each saving motive depends on the age and the life-cycle stage of the household.2 percent of gross saving. Their results show that the number of siblings signiﬁcantly decreases both the likelihood and amount of parental contribution to children’s college education.1 Given the rapidly rising cost of college tuition. respectively.1 percent of gross saving. This chapter also uses the amount of parental expenditure on children’s college education as a measure of child quality. Moreover. bequests. Horioka and Watanabe [29] analyze the amount of gross saving and dissaving for each of twelve motives including saving for retirement. education and so on. 2 See Browning and Lusardi [6] for a survey of the literature. Steelman and Powell [51] argue that later-born children are more favored relative to earlier-born ones due to the family life cycle. It would be of interest to investigate this eﬀect on the level of parental support using the information on household savings. ordinal position alters parental support in favor of later-born children. emergencies. saving for ‘rainy days’ and saving for bequests and inter vivos transfers. Parents have more resources when later-born children reach college age.7 and 28. Saving for children’s education is the third most important saving motive after saving for retirement and ‘rainy days’ and accounts for 9. an analysis of ﬁnancing college education and family size highlights an important aspect of the quality-quantity model.lihood and amount of parental support. 1 76 . using Japanese household data. The data set used in the chapter does not provide information on the ordinal position of the child attending college.

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

’ retirement and other reasons show a systematic trend relative to the total number of children. 24. the eﬀect of the number of children on the percentage of households reporting saving for children’s education disappears. Among the households in the bottom 25 percentile of the wealth distribution. and the percentage of households citing retirement as the most important reason increases. 5. This table shows that the number of 78 .8 percent). Among the households in the higher wealth groups. the percentage of households saving for retirement increases with wealth. while only 2. Controlling for the number of children. among households with 1 or 2 children. As the number of children increases.1 also shows the percentage of households citing each saving motive by the number of children and net worth in 1983.7 percent of those in bottom 25 percentile of wealth distribution report saving for retirement. a higher percentage of the households with one or two children report saving for children’s education than those with three or more children (8. Table 4.3 percent vs.The percentage of households saving for ‘rainy days.4 percent in the top 25 percentile report saving for retirement. The percentage of households in the 25-75 percentile of the wealth distribution citing ‘rainy days’ as the most important saving motive is higher than the percentage of households in the lower and higher wealth groups. An almost equal number of households with one or two children and with three or more children report saving for children’s education as the most important reason. the percentage of households citing ‘rainy days’ and other reasons as the most important reason decreases. For example.

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

4 provides a framework for the empirical analysis of the interaction between savings and college expenditures.5 estimates the determinants of college expenditures and uses these estimates to investigate the eﬀect of expected college expenditures on household savings. a summary and conclusions are presented in Section 4. Section 4.6. In the second period.3) (4.2 A Model of Saving for College This section considers a world in which individuals (parents) live for two periods.3 describes the 1983-86 SCF. Parents choose ﬁrst-period consumption. investment to each child’s education. n) subject to c1 = y1 − A c2 = y2 + (1 + r)A − πen 80 (4. Section 4. c2 . 4.2) (4.alyzes a model of the quality-quantity interaction of fertility with household savings. per capita college investment is assumed to be equal for all n children. Finally. For simplicity. In the ﬁrst period. e. and the family consumes together c1 and saves A to earn interest at the rate of r. and the number of children to maximize U = U (c1 . Section 4.1) . a couple earns y1 . second-period consumption. chooses to have n children. 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.

Substituting (4. n) (4.5) (4.1) yields the following unconstrained maximization problem: U = U (y1 − A. Since the right-hand side is a constant.2) and (4. educational expenses (e) and the number of children (n).4) where the three choice variables are accumulated assets (A). which results in an increase in accumulated assets. y2 + (1 + r)A − πen.where π is the price of education.7) where U1 and U2 are the marginal utility of consumption in the ﬁrst and second periods. respectively. and Un is the marginal utility of family size. If the utility function is CES with equal elasticity of substitution between all arguments. y2 + (1 + r)A − πen (4. 81 .8) where γ is the elasticity of substitution. equation (4.3) into (4.5) can be written as follows: 1 y1 − A = (1 + r) γ−1 . e. a decrease in second-period consumption is likely to decrease the ﬁrst-period consumption. The ﬁrst-order conditions are −U1 + (1 + r)U2 = 0 −πnU2 + Ue = 0 −πeU2 + Un = 0 (4.6) (4. Ue is the marginal utility of children’s education. This expression implies that an increase in educational expenses decreases the second-period consumption relative to ﬁrst-period consumption.

To extend the analysis to account for uncertainty. let us assume that the second period wage income y2 is stochastic. The interaction of the quality and quantity dimensions of choice is reﬂected in the fact that the marginal costs of education and family size depend on the level of each other in equations (4.7). If the third derivative is positive. household saving can be associated with two diﬀerent saving motives: saving for uncertainty about future income (precautionary saving) and saving for children’s education. E1 [U2 ] exceeds U2 [E1 ]. The empirical speciﬁcation of the model described below controls for precautionary saving while it estimates the eﬀect of educational expenses on household savings.6) and (4.3 The combination of a positive third derivative of the utility function and uncertainty about future income reduces consumption in the ﬁrst period. 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. This interdependence implies an inverse relationship between the number of children and educational expenses. When uncertainty about future income is assumed. 3 82 . Solving the consumer’s problem yields the following equation −U1 + (1 + r)E1 [U2 ] = 0 where E1 represents the expected marginal utility of consumption in the second period conditional on all information available in ﬁrst period. then U2 is a convex function.

This variable includes children of previous marriages living with former spouses. SAVE1.824 households and a high-income supplement of 438 households. The respondents were also asked how many years of college their children completed from 1983-85. In 1986. 4 83 . savings and other control variables. income and demographic characteristics.4 The college expenditure variable (COLLEXP) captures the quality dimension associated with the expenditure per child. liabilities. including those not living in the household. 2. The variables used in the empirical analysis are classiﬁed into four groups: fertility. I use the number of children attending college and the number of years they attended to normalize college expenditures. The SCF contains detailed information on household assets. 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 1983 survey contains interviews from a random sample of 3. college expenditure. Household savings are measured in two ways. In 1986.3 Data The empirical analysis uses data from the 1983-1986 SCF. The ﬁrst measure. The college expenditure variable is the outlay of college education per child. Unfortunately. the data does not diﬀerentiate between children away in college or living on their own and with former spouses.4.822 of these households were reinterviewed. The fertility variable (CHILD) is the number of children of either the respondent or spouse.

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

2 presents summary statistics of the variables used. it saves $4. Appendix C.296.931 and $3. The average household in the sample is headed by a forty two year old married high school graduate and includes two children. respectively.575 in 1986 dollars.is the diﬀerence between reported income in 1985 and estimated permanent income. Households with retired household heads are assumed to be in the life-cycle stage of dissaving.000 are excluded to avoid the diﬃculty of modeling the relationship between educational expenditures and savings. For households with nonzero college expenditures. Table 4. the typical household saves $5.1 gives a detailed deﬁnition of the variables used in the estimation of the model.005. Also. The head of the median household reports that it is all right to borrow money for educational expenses.811. According to the ﬁrst measure of savings. The sample is also constrained to include only the households with nonretired household heads and their spouses if the head is married.3 presents average household savings and college expenses by 85 . the average expenditure is $2. Estimating the relationship between savings and educational expenditures is complicated for families who experienced a major change in composition such as marriage and divorce. Permanent and transitory incomes in 1985 are $25. households with family income above $100. The average household net worth in 1983 is $81.806 and according to second measure.690 households. The sample is restricted to families that did not change composition from 1983-86. Table 4. These restrictions leave us with a sample containing 1.

household savings increase with the number of children in college. household savings increase with the number of children in college.9) (4.the number of children attending college. college expenditures per child decreases. The data show that college expenses increase with net worth. The data show that households continue to save while children are in college. Except the households in the bottom 25 percentile of the net worth distribution with two or more children attending college. However. 4. the number of children in college is inversely related to the expenditure per child as predicted by the quantityquality model. Households in the top 25 percentile of the wealth distribution with two or more children in college save on average $18.077. As the number of children in college increases. more than twice as much the households in the same wealth group with one child in college.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. Table 4.3 also breaks down savings and college expenses by the number of children in college and net worth in 1983. 25-75 percentile and top 25 percentile) spend less per child as the number of children attending college increases.10) . However. Households in all three wealth groups (bottom 25 percentile. Savings of households with children in college increase with net worth.

κ3 is a vector of parameters. The structural disturbances ui = (u1i . the data on household fertility gives the number of children ever born to a household headed by a person of a certain age. u2i ) are assumed to be randomly drawn from a 2-variable distribution with E(ui ) = 0 and E(ui ui ) = . is obtained to estimate the expected educational expenses. The expected completed family size is given by E[n] = exp(x3i κ3 + φi ) (4. and φi is an age speciﬁc factor. the completed fertility. δ1 < 0.e. i. n. The model predicts that an increase in the number of children decreases the anticipated and actual educational expenditure. η2 > 0.11) where x3i is a vector of demographic characteristics.e. However. The theoretical model derives predictions concerning the eﬀect of the completed lifetime fertility on the educational expenses. I use estimates of the parameters of a Poisson regression model to construct the completed fertility proﬁle when the household head is 55 years old. 6 87 . Therefore.where x1i and x2i are the vectors of exogenous variables. Another prediction of the model is that educational expenses increases household savings.6 Information on educational expenses is available only if the household has a child attending college and if the household spends a positive amount The model is also estimated using the predicted number of children obtained from the Poisson model. and κ1 and κ2 are the vectors of parameters to be estimated. i. The empirical results hold true for this measure of fertility too.

Then I use the estimates of those parameters to construct the proﬁle of anticipated educational expenses. 88 . However. gender (FEMALE). Married households have more children.4 are consistent with previous studies. and a dummy indicating whether the household does not live in a SMSA area (NSMSA). I estimate a Tobit model for the educational expenditures of the households with children attending college. and education of the spouse (HIGHSCHSP and COLLEGSP). An increase in the permanent income increases the number of children. Let gi = 1 indicate that the household has a child attending college. gi = 0 indicate that none of the children are attending college.4 contains estimates of the Poisson regression model of the fertility equation. households headed by high school and college graduates have fewer children than those headed by persons without a high school degree. The right-hand variables include household demographics expected to aﬀect the number of children: namely. martial status (MARRIED). race (BLACK) and the education of the household head (HIGHSCH and COLLEG). First. Estimates of the coeﬃcients in Table 4.5 Estimation and Results Table 4. I obtain expected i i educational expenses as follows. age (AGE). Controlling for permanent income. a dummy indicating whether the spouse works for a full time job in 1983 (FSPOUSE). 4. Then e∗ is observed to be ei if e∗ > 0 and gi = 1. permanent income (PERINC).on ﬁnancing her education.

03. The average CHILD is 3. age (AGE) and education (COLLEG) of the household head. Table 4. and permanent and transitory income (PERINC and TRINC).5 reports estimates of the equation (4. Households with children attending college between 1983-86 are included in the estimation of the Tobit regression. The instrumental estimate of the coeﬃcient on the number of children is almost three times as large as the OLS estimate (-$459 vs. SEMERG. households with spouses working full-time and with high school and college degrees have fewer children. As predicted by the quantity-quality model.controlling for marital status. 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 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 . the amount of college expenditure decreases with the number of children.690 households in the sample. 338 had a child attending college between 1983-86. and 252 reported contributing a positive amount to their children’s college expenses.9). SCHEDUC and SHOME). I use the estimates of the regression to predict the completed household fertility when the household head is 55 years old (CHILD). Columns 1 and 2 contain the results with CHILD and columns 3 and 4 contain the results with CHILD. -$187). Of the 1. namely. The right-hand variables also include other factors that might aﬀect the college expenditures.

While the average contribution of households in the bottom 25 percentile of wealth distribution is $1. an additional child results in a drop of $317 in expected college expenditures at the mean of values. ˆ Using the approximation. to calculate the expected college expenditures (COLLEXP ). the average contribution of the top 25 percentile is $3. ˆ σ (4. The amount of contribution to children’s college education increases with wealth.12) where σ is the estimate of the standard error. The last two columns of Table 4. I use estimates of the Tobit model and the expected completed fertility. Table 4.436. CHILD.5 show that increases in permanent and transitory income increase the level of expenditures for educational expenses.093 per child. respectively. Households with heads who believe that it is all right to borrow for educational expenses have higher expenditures. Estimates in Table 4. Households citing saving for retirement and buying a home as the most important reason for saving spend less on children’s education. The average COLLEXP is $1. Estimated contributions of the households with children in college are very close to the actual expenses.6 show SAVE1 and SAVE2 for households with 90 . and δ1 and κ1 are the estimates of δ1 and κ1 . Φ is the standard normal cumuˆ ˆ lative distribution.6 presents actual and estimated college expenses by household net worth in 1983.789 per child. Households citing saving for children’s education as the most important reason for saving spend more than other households.variables as follows: ˆ ˆ δ1 ∗ Φ((δ1 ni + x1i κ1 )/ˆ ).

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

citing a motive other than retirement or emergencies as the most 92 . 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. the ﬁgure ﬁrst calculates savings of a typical household expecting to contribute $2. I mean a household in the 25-75 percentile of the wealth distribution. saving for emergencies does not signiﬁcantly aﬀect savings. For each age group. Using the estimates in Table 4. This result does not necessarily mean that households are not saving for children’s college education.833 more than other households. the data does not have detailed information on the years that children were attending college between 1983 and 1986. Also. Permanent income increases both SAVE1 and SAVE2. the number of children attending college does not signiﬁcantly decrease household savings. Households citing saving for retirement as the most important reason save more. households with heads who are willing to undertake risky investments save $7. household savings are calculated in ﬁve year intervals. Unfortunately. Finally. showing that households save approximately 39 percent of their transitory income.000 to college expenses and compares it to what it would have saved. By typical. households in the bottom 25 percentile of the wealth distribution save $2. However. The eﬀect of transitory income on both measures of savings is positive and signiﬁcant.398 less than those in the middle of the wealth distribution .7. Finally. Figure 4.savings after age 28. had it not expected to contribute a positive amount.493 more and households in the top 25 percentile save $11.1 shows the eﬀect of the age of the household head on SAVE1.

If we assume. headed by a male.000 college expenses increase with age.894. The eﬀect of expecting to contribute $2000 on household savings is $8. that this household starts saving for retirement when the household head is 43 years old.6 Conclusion This chapter examines the eﬀect of saving for children’s college edu- cation on household savings. This ﬁgure only shows that controlling for other factors. Saving motives change with age and household composition. If the household does not expect to contribute to children’s college expenses. savings decline to zero at the age of 43.894. This striking result is due to the assumption that this household is assumed not to cite saving for retirement as the most important reason.000 between 1983-86.7 show that the eﬀect of saving for retirement on household saving is positive and raises household savings by $4. The household is assumed to have average permanent and transitory incomes for their age group. this will increase its saving by $4. 4. who is not willing to undertake risky investments and did not receive a windfall greater than $3. and it increases with the age of the household head. for example.000 at the age of 43. the eﬀect of anticipated college expenses on savings is positive and signiﬁcant.important saving motive. I also obtain predictions 93 . The results in Table 4. The results show that savings of the household with an anticipated $2. 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.

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

009 0.016 95 0.377 0.043 0.029 0.471 0.023 0.066 0.380 NOSAVE 0.063 0.004 0.115 0.330 0.102 0.341 0.053 SHOME 0.033 0.440 0.381 0.060 0.057 0.058 0. Notes: This table reports the proportion of households citing the selected motives as the most important reason for saving.000 0. Tabulations are weighted using the sample weights.021 0.035 SOTHER 0.310 0.027 0. 1983.455 0.013 0.345 SEMERG SCHEDU 0.244 0.278 0.057 0.032 25-75p 75 to 100p Source: Survey of Consumer Finances. SOTHER: saving for other reasons and NOSAVE: cannot/does not save.469 0.’ SCHEDU: saving for the education of children.083 0.341 0.007 0.079 0.037 NWORTH 0-25p 0 1-2 3 or more 0 1-2 3 or more 0 1-2 3 or more 0.369 0.337 0.279 0.053 0.543 0. SRETIRE: saving for retirement.212 0.064 0.382 0.027 0.042 0.074 0. The number of observations N=1690.153 CHILD 0 1-2 3 or more 0.016 0.264 0.404 0. SHOME: saving to buy a home.068 0. SEMERGE: saving for ‘rainy days.120 0.397 0.049 0.049 0.391 0.070 0.355 0.Table 4.042 0.023 HH 0.043 0.002 0.223 0. .000 0.010 0.383 0.339 0.1: Saving Motives By the Number of Children SRETIRE 0.087 0.000 0.082 0.351 0.009 0.401 0.

64 NWORTH 81575.33 MARRIED 0.43 COLLEG 0.24 0.14 COLLEXP> 0 2005.86 0. All variables are described in Appendix C.Table 4.43 14.17 0.35 WINDF 0.41 33402. All dollar values are reported in 1986 dollars.32 15127.08 0.13 0.08 161860.48 BEDUCAT 0.13 35397. Notes: Tabulations are weighted using sample weights.36 SAVE1 5806.65 0.32 2817.68 AGE 42.47 2.2: Descriptive Summary of Variables Variables Mean Std.86 PERINC 25931.24 0.28 0. 1983-86.50 BLACK 0.10 FEMALE 0. Deviation CHILD 2.28 RISKY 0.11 12491.1.37 NSMSA 0.43 HIGHSCH 0.53 0.45 Source: Survey of Consumer Finances. The number of observations N=1690.47 SAVE2 4811.75 TRINC 3296. 96 .

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

and * indicates signiﬁcance at 10 percent level.038 0.293 Source: Survey of Consumer Finances.022 0.126 ** -0.1. Notes: ** indicates signiﬁcance at 5 percent level.435 0.128 ** 0.038 0.106 0.078 0.032 0. Error -1.090 ** -0.48 0.057 ** -0.4: Poisson Regression: Number of Children CONSTANT AGE FEMALE FSPOUSE HIGHSCH COLLEG BLACK MARRIED NONSMSA PERINC/1000 HIGHSCHSP COLLEGSP N OBS Mean of dependent variable Log L R2 Coeﬃcient Std.389 0.062 ** 1.134 ** 0.062 ** 1690 2.408 0.Table 4.930 0.964 0.461 0. 1983-86. Variables are described in Appendix C.097 ** 0.717 0. 98 .145 ** 0.039 ** -0.43 -2971.004 ** -0.

6 -1124.5: Tobit Estimates of College Expenditure Equation Coeﬃcient Std.7 * 997. 1983-86.746 -2429.3 2444.1. and * indicates signiﬁcance at 10 percent level.0 409.1 550. Notes: ** indicates signiﬁcance at 5 percent level.7 1467.1 611.0 0.6 -407.8 468.5 22.2 19.9 ** -4903.9 ** 67.8 -7.1 72.4 1589.5 18. Error Coeﬃcient Std.9 -45.6 408.4 10.0 9.8 473.9 ** -187.4 92.6 1452. Error -601.3 609.Table 4.5 551.6 133.2 88.0 ** 72.4 555.8 -372.4 23. All variables are described in Appendix C.81 CONSTANT AGE CHILD CHILD PERINC/1000 BEDUCAT SRETIRE SEMERG SCHEDUC SHOME COLLEG TRINC/1000 SIGMA N OBS Proportion of + observations Log L ** ** * ** ** * ** ** -2429.1 1063.7 ** 1391.8 ** -1103. 99 .8 232.9 -458.7 338 .5 472.70 Source: Survey of Consumer Finances.5 -1335.0 ** 2905.2 2524.9 2912.3 134.1 -4936.9 557.

All dollar values are reported in 1986 dollars. The number of observations N=1690.Table 4.59 2334 17. Notes: Tabulations are weighted using sample weights.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.65 0 1.29 1436 44.02 0 7. 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. 1983-86. CHCOLL=1 if the household has a child attending college between 1983-86 (0 otherwise).52 0 5.

1983-86.2 5041.3 10.2 3. and * indicates signiﬁcance at 10 percent level.3 -774.6 388.084 Source: Survey of Consumer Finances.4 2434.3 0.7: 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.8 160.6 1516.3 2954.2 -10.1 * 4679.9 11080.0 -11398.3 0. All variables are described in Appendix C.3 416.2 ** -1284.1.0 1642.0 5607.8 2783.5 2409.9 139.8 4.0 382.2 3422.8 3349.8 ** 6820.5 0.8 761.0 1271.1 4.3 2016.5 2493. Notes: ** indicates signiﬁcance at 5 percent level.6 ** -9329.9 1728.8 -615.7 ** 0.3 ** 10. . a Predicted value of the variable from Tobit regression of educational expenditures.9 2474.3 ** 309.1 2796.6 407.8 163.5 1325.5 .0 7833. Error ** 22327.2 3.8 3199.3 * 3028.4 2538.1 3139.6 2026.2 ** -9.8 .0 -790.6 10944.0 2460.Table 4. Error 22618.6 -315.8 140.2 1820.4 ** 336.1 4894.8 382.5 -1310.107 SAVE2 Coeﬃcient Std.

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

Appendices 103 .

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

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

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

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

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

VRI MEANINC PERMINC TRANS NWORTH NWORTH25 Variance of log income. Mean of the residual income from the earnings regression. AGE Age of the household head in 1983. 109 .Appendix B Appendix for Chapter 3 B. SAVE2 First diﬀerence in net worth between 1983-89 controlling for capital gains in home prices divided by 6. Household net worth in 1983. Mean of the predicted income from the earnings regression. =1 if the household in the bottom 25 percent of the net worth distribution in 1983. VRLI Variance of residual of log income from the earnings equation. NWORTH90 =1 if the household in the 10 percent of the net worth distribution in 1983. Mean of reported income between 1982-88.1 Name SAVE1 Deﬁnition of Variables Description First diﬀerence in net worth between 1983-89 divided by 6.

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

111 .Appendix C Appendix for Chapter 4 C. =1 if the household is in the bottom 25 percentile of the wealth distribution. Amount of expenditure on the college education of a child in 1986 dollars. =1 if the household head has a high school degree. AGE FEMALE HIGHSCH Age of the household head in 1983. Diﬀerence between net worth in 1986 excluding the capital gains on primary residence and net worth in 1983 divided by 3. NWORTH NWORTH25 Net worth in 1986.1 Name CHILD COLLEXP Deﬁnition of Variables Description Number of children ever born to the household head. NWORTH75 =1 if the household is in the top 25 percentile of the wealth distribution. =1 if the household head is female. Diﬀerence between net worth in 1986 and 1983 divided by 3. PERINC TRINC SAVE1 SAVE2 Predicted 1985 household income. Diﬀerence between total income in 1985 and permanent income.

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

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

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