household saving in ldcs credit markets insurance and welfare some ways in which farmers in ldcs can protect their living standards against fluctuations in income are discussed after considering the theory of consumption under uncertainty when there is no or limited borrowing the case where some borrowing is allowed is also examined empirical evidence from some ldcs is used to look at i household borrowing and lending their importance and timing and their role in smoothing consumption and ii the life cycle behavior of consumption and income the results suggest that hump lifecycle saving is not likely to be a very important generator of wealth in ldcs and provide further evidence on the limited role of credit markets

insuring and u y abstract we establish that an agent increases decreases her savings when insurance becomes unavailable when her marginal utility of consumption is convex concave in income a mean neutral not preserving spread figures in the analysis when the odds are actuarially unfair increasing decreasing absolute risk aversion is necessary and sufficient for an agent to increase decrease her holding of insurance in response to an increase in her wealth increasing absolute risk aversion is sufficient for insurance being purchased to decline in response to a higher price less fair odds

the importance of group coverage how tax policy shaped u s health insurance in 1954 the internal revenue service stipulated that employer contributions to the health insurance plans of their employees were to be excluded from employee taxable income today the tax subsidy is major feature of the u s health care market this paper examines the initial effects of the tax subsidy on the demand for health insurance using previously unexamined data from 1953 and 1958 results suggest that the tax subsidy increased the growth of group insurance particularly among union members and employed persons this is a critical effect because group insurance is not only less expensive than individual insurance but it is also easier to obtain and households with access to group health insurance are far more likely to purchase health insurance coverage than those without similar access by increasing access to group insurance the tax subsidy fostered an increase in the purchase of group health insurance by people who may not have purchased individual coverage and generated institutional change as it cemented an employment based system of group health insurance in the united states this abstract was borrowed from another version of this item

women s suffrage political responsiveness and child survival in american history women s choices appear to emphasize child welfare more than those of men this paper presents new evidence on how suffrage rights for american women helped children to benefit from the scientific breakthroughs of the bacteriological revolution consistent with standard models of electoral competition suffrage laws were followed by immediate shifts in legislative behavior and large sudden increases in local public health spending this growth in public health spending fueled large scale door to door hygiene campaigns and child mortality declined by 8 15 or 20 000 annual child deaths nationwide as cause specific reductions occurred exclusively among infectious childhood killers sensitive to hygienic conditions

the future of macroeconomics macro theory and models at the bank of england abstract the adoption as policy models by central banks of representative agent new keynesian dynamic stochastic general equilibrium models has been widely criticised including for their simplistic micro foundations at the bank of england the previous generation of policy models is seen in its 1999 medium term macro model mtmm instead of improving that model to correct its considerable flaws many shared by other non dsge policy models such as the federal reserve s frb us it was replaced in 2004 by the dsge based beqm though this clearly failed during and after the global financial crisis it was replaced in 2011 by the dsge compass complemented by a suite of models we provide a general critique of dsge models for explaining forecasting and policy analyses at central banks and suggest new directions for improving current empirical macroeconomic models based on empirical modelling broadly consistent with better theory rather than seeking to impose simplistic and unrealistic theory

wealth accumulation over the life cycle and precautionary savings this article constructs and simulates a life cycle model of wealth accumulation and estimates the parameters of the utility function the rate of time preference and the coefficient of risk aversion by matching the simulated median wealth profiles with those observed in the panel study of income dynamics and in the survey of consumer finances the estimates imply a low degree of patience and a high degree of risk aversion the results are used to study the importance of precautionary savings in explaining wealth accumulation they imply that wealth accumulation is driven mostly by precautionary motives at the beginning of the life cycle whereas savings for retirement purposes become significant only closer to retirement

are poor people credit constrained or myopic evidence from a south african panel credit constraints are an almost ubiquitous assumption in development economics yet direct evidence for credit constraints is limited and many observations consistent with credit constraints are equally compatible with myopic non forward looking consumption or precautionary saving using household panel data and a source of widely anticipated income in south africa this paper tests and rejects the standard consumption model with perfect capital markets then myopic consumption and precautionary saving are tested as alternative explanations for the observed jumps in expenditure the standard model with credit constraints cannot be rejected in favour of myopic consumption or precautionary saving

portfolio choice and liquidity constraints we study the infinite horizon model of household portfolio choice under liquidity constraints and revisit the portfolio specialization puzzle we show why the puzzle is robust to several model variations and argue that positive correlation between earnings shocks and stock returns is unlikely to provide an empirically plausible resolution we find that relatively small fixed costs for stock market entry are sufficient to deter stockholding because for a plausible range of parameter values households can achieve desired consumption smoothing with small or zero holdings of stocks such costs could arise from informational considerations sign up fees and investor inertia

precautionary wealth accumulation evidence from canadian microdata this paper estimates the effect of labour income uncertainty on wealth accumulation using two data sources wealth information is obtained from the master files of the new canadian survey of financial security 1999 sfs labour income risk proxies are constucted by industry using the canadian survey of labour and income dynamics slid between 1996 and 2001 the empirical results suggest the presence of a strong precautionary saving motive among canadian households for broad definitions of wealth furthermore consistent with the buffer stock saving model the level of precautionary funds significantly increases when households face liquidity constraints ce texte calcule l effet de l incertitude du revenu de travail sur l accumulation de la richesse a l aide de deux sources de donnees les donnees sur la richesse sont tirees des resultats de l enquete sur la securite financiere esf de 1999 les coefficients de risque attaches aux diverses industries sont developpes a partir des resultats de l enquete sur la dynamique du travail et du revenu edtr entre 1996 et 2001 les resultats empiriques suggerent la presence d une forte motivation des menages canadiens aepargner aux fins de precaution si l on accepte des definitions assez comprehensives de la richesse de plus d une maniere qui correspond au modele d epargne pour stockage tampon le niveau des fonds aux fins de precaution s accroit de maniere significative a proportion que les menages font face a des contraintes de liquidite

birth order schooling and earnings birth order effects are posited by many to affect earnings and schooling we show how such effects can be interpreted to shift either the earnings possibility frontier for siblings or parental preferences we find empirical evidence for birth order effects on age adjusted schooling and on earnings for young u s adults though the latter is not robust for all specifications the examination of intrahousehold allocations suggests that these birth order differences occur despite parental preferences or prices by birth order favoring later borns apparently because of stronger endowment effects that favor firstborns

liquidity risk and banks asset composition implications for monetary policy monetary growth models in which the government is a net debtor demonstrate that inflation adversely affects capital formation through the crowding out effect interestingly the results are at odds with empirical evidence in particular recent studies point to an asymmetric relationship between inflation and the real economy across countries specifically inflation and output are negatively correlated in poor countries in contrast inflation is associated with higher levels of economic activity in advanced economies i present a monetary growth model with public debt where the exposure to risk is inversely related to the level of income in this setting i demonstrate that the effects of monetary policy depend on the level of capital of the economy in poor countries banks portfolios consist primarily of government liabilities therefore a higher rate of money creation inhibits capital formation in these economies in contrast banks devote more resources toward productive uses in advanced countries consequently monetary policy generates a tobin effect

sex and earnings in industrial society a nine nation comparison a substantial difference in average earnings between men and women employed full time is documented for each of nine industrial nations and several hypothesized explanations for the earnings gap are explored a human capital hypothesis women earn less because they have less education and experience a dual career hypothesis women earn less because they adjust their work behavior to meet the demands of family obligations and an occupational segregation hypothesis women earn less because they are concentrated in lowlevel jobs none of these hypotheses receives much support in any country leaving open the possibility that the earnings differences are due to deeply entrenched institutional arrangements that limit women s opportunities and achievements

have filipino households become less prudent abstract throughout the 2000s the average household saving rate in the philippines declined sharply this article explains why households consumption growth has been higher than income growth during this period tracing cohorts shows that saving declined across all demographic groups a test that provides the strength of the precautionary saving motive yields a plausible explanation that households have become financially constrained and less prudent in recent years this article argues that these patterns are best explained by the extended coverage of the social security system particularly to informal sector employees during the 1990s in the philippines

long term consequences of short term precipitation shocks evidence from brazilian migrant households we find that large short term precipitation shocks damage the long term income of households that have permanently migrated from rural to urban areas this outcome is consistent with the behavior of credit constrained rural households who are willing to accept lower long term income in urban areas following the depletion of their productive assets during an adverse shock our empirical evidence suggests that there may be a link between large precipitation shocks in rural areas and urban poverty further exploration is warranted on the mechanisms by which natural disasters cause these long term losses

country studies and the value of household production as a result of progress in economic theory especially the new home economics data availability and improvements in data collection methods and the increased desirability of reflecting social welfare concerns in the conventional national income and product accounts there has been recently a renewed interest in the accounting and valuation of non marketed activities primarily household production this paper surveys and brings up to date twenty major empirical studies on housework evaluation in north america europe and asia a summary is provided for each study on the methodologies chosen and findings on the quantity and economic value of household production because the resulting gnp values of household production vary by as much as 20 to 60 explanations for this disparity are also offered

behavioral responses to risk in rural china does risk perpetuate poverty in a credit constrained economy jalan and ravallion study portfolio and other behavioral responses to measured risk using household panel data for rural china one quarter of wealth is held in unproductive liquid forms but only a small share of this appears to be a precaution against income risk the authors estimate that eliminating income risk would reduce the share of wealth held in liquid form by less than 1 percentage point moreover that effect is confined largely to middle income groups high income households do not it seems need to hold unproductive cautionary wealth and the poor probably cannot afford to do so the authors find no evidence that income risk discourages schooling but risk does inhibit the out migration of labor generally the results provide only limited support for the idea that uninsured risks promote unproductive portfolio behavior in this setting there is such an effect but it is small in magnitude and cannot be deemed an important cause of poverty

does increasing women s schooling raise the schooling of the next generation the positive cross sectional relationship between the schooling of mothers and their children is substantially biased upward due to correlations between schooling and heritable ability as well as assortative mating an increase in the schooling of women would not have beneficial effects in terms of the schooling of children increased maternal schooling leads to reduced home time for mothers anticipating the consequences of investing in women s schooling requires attention to the role that schooling plays in the marriage market as well as to opportunities in the labor market for women

option values to conservation and agricultural price policy application to terrace construction in kenya policy reforms to liberalize agricultural markets in developing countries are likely to influence both the level and the variability of prices while considerable attention has been given to the impact of changes in price level on soil and water conservation there has been relatively little analysis of the role of price variability in conservation decisions we present a model of investment under uncertainty to analyze the effect of both level and variability of prices on the decision to invest in conservation the model is applied to adoption of fanya juu terraces in eastern kenya

expanding the life cycle model precautionary saving and public policy one of the key puzzles in understanding saving behavior is not so much why people save the title of this session but why people don t save according to the familiar life cycle model households should accumulate wealth to provide for their retirement consumption the surprising result from the data is the sizable fraction of the population who have accumulated so little even among those nearing retirement given that earnings will almost surely decline when households retire such behavior can imply poor living standards for the elderly some might interpret the low wealth accumulation as being evidence of myopia irrationality or a failure of households to enforce mental accounting richard thaler 1994 while others might view the low level of wealth accumulation as evidence of high individual rates of time preference determining the underlying causes of low wealth is crucial for public policies that seek to alleviate low aggregate saving rates in the united states as well as policies that seek to buttress the adequacy of financial resources for the elderly in this paper we outline what we believe to be the causes of why many people do not save we conclude by speculating about government policies that may be most effective at encouraging saving much of the research examining levels of consumption saving and wealth as well as their responsiveness to policy has been done using a life cycle model with the simplifying assumption of perfect certainty alan auerbach and laurence kotlikoff 1987 for example developed a model with 55 overlapping generations of individual lifecycle households each with empirically plausible age earnings profiles and utility parameters and used the model to address tax policy and demographic issues in a regime in which all households are identical within a generation and all generations know future earnings and interest rates more recently a line of inquiry has examined the effects of uncertainty on saving generally in the context of highly stylized models this research has shown that in these models uninsured earnings uncertainty can alter optimal saving behavior in a variety of important ways for a partial review of this precautionary saving literature see hubbard et al 1994 in two recent papers hubbard et al 1993 1994 we have combined these two strands of the literature by examining the implications of a life cycle model of consumption saving and wealth accumulation subject to what we think are the three most important sources of uninsured idiosyncratic risk facing households uncertainty about earnings medical expenses and length of life our intent has been to create a realistic model in which families live for many periods working for part of their lives and retiring later in life to parameterize the uncertainty facing families we estimate tdiscussants christopher carroll federal reserve board john b shoven stanford university laurence kotlikoff boston university

valuing family household production a contingent evaluation approach the time of family members is often refgarded as an important input used in family household production unlike existing methods used in the valuation of the time spent in home production namely the opportunity cost of time and the replacement cost method a contingent evaluation approach is proposed here consistent with the way non market goods an services are valued the method essentially elicits people s willingness to pay for household production whilst taking into account opportunity costs particular attention is also paid to the objective of valuation whether it is for gnp accounting matrimonial property settlements or for welfare and compensation issues and the appropriate measures to be used marginal total and net valuation using a model of home production these different meaures of economic value are distinguished both conceptually and in their uses the results from a modest study of household production using the methods described here are presented these results are then compare

intergenerational risk sharing and risk taking of a pension fund abstract by using their financial reserves efficiently pension funds can smooth shocks on their asset returns and can thus facilitate intergenerational risk sharing in addition to the primary benefit of improved time diversification this form of risk allocation affords the additional benefit of allowing these funds to take better advantage of the equity premium which also favors the consumers in this paper our aim is twofold first we characterize the socially efficient policy rules of a collective pension plan in terms of portfolio management capital payments to retirees and dividend payments to shareholders we examine both the first best rules and the second best rules where in the latter case the fund is constrained by a solvency constraint and by a guaranteed minimum return to workers contributions second we measure the social surplus of the system compared to a situation in which each generation would save and invest in isolation for its own retirement we estimate that the certainty equivalent return of the pension saving scheme goes from 3 23 per year to 3 76 when intergenerational risk sharing is introduced one of the main results of the paper is that better intergenerational risk sharing does not reduce the risk born by each generation rather it increases the expected return to the workers contributions

birth order family size and achievement family structure and wage determination do birth order and the size of one s childhood family influence environment thereby potentially affecting future achievement this article investigates the hypothesis that they do presenting two major empirical findings first neither birth order nor childhood family size significantly influences the level or growth rate of wages a result that is consistent with previous research second family size is both a statistically and economically significant determinant of women s employment status women from small families work less than women from large families when they are young and more than women from large families when they are more mature

life cycle consumption under social interactions abstract in this paper we examine how social interactions affect consumption decisions at various levels of aggregation in a life cycle economy made up of peer groups for this purpose we consider two analytically solvable life cycle models one under certainty equivalent behavior and one under prudence and explicitly allow for three different forms of social interactions in peer groups namely conformism altruism and jealousy we show that whether social interactions have any effects on individuals optimal consumption decisions critically depends on intertemporal rather than static considerations this is true regardless of whether individuals preferences are time separable or exhibit habit formation and whether information within peer groups is homogeneous or disparate it implies that analyzing the effects of social interactions in static rather than intertemporal settings is likely to be misleading we also show that social interactions when coupled with either habit formation or prudence can significantly strengthen the effects of habit formation or prudence in the direction of resolving two well known puzzles in the literature on the permanent income hypothesis namely excess smoothness and excess sensitivity

workers compensation and consumption smoothing abstract this paper investigates the consumption smoothing benefits of state workers compensation wc programs these programs are among the largest and most controversial forms of social insurance with the putative purpose of supporting families affected by unexpected income shocks due to workplace injuries and illnesses using health and retirement study hrs data for a sample of workers who have experienced a work related work limiting disability i find that a 10 increase in wc benefit generosity offsets the drop in household consumption upon injury by 3 to 5 moreover my estimates imply that if benefits were very low the drop in consumption upon injury would be in the range of 30 a model adapted from the literature on optimal social insurance yields a formula for the optimal level of wc benefits which depends on empirical estimates of the consumption smoothing parameter my calculations suggest that current wc benefit levels are somewhat higher than optimal

mortgage default during the u s mortgage crisis this paper asks which theories of mortgage default are quantitatively consistent with observations in the united states during 2002 2010 theoretical models are simulated for the observed time series of aggregate house prices their predictions are then compared to actual default rates on prime fixed rate mortgages an out of sample test discriminates between estimated reduced forms of the two most prominent theories the test reveals that the doubletrigger hypothesis attributing mortgage default to the joint occurrence of negative equity and a life event like unemployment outperforms a frictionless option theoretic default model based on this finding a structural partialequilibrium model with liquidity constraints and idiosyncratic unemployment shocks is presented to provide micro foundations for the double trigger hypothesis in this model borrowers with negative equity are more likely to default when they are unemployed and have low liquid wealth the model explains most of the observed strong rise in mortgage default rates a policy implication of the model is that subsidizing homeowners can mitigate a mortgage crisis at a lower cost than bailing out lenders

health insurance and savings over the life cycle a semiparametric smooth coefficient estimation individuals save for future uncertain health care expenses this is less efficient than pooling health risk through insurance the provision of comprehensive health insurance may raise welfare by providing the missing market to smooth out consumption through the life cycle we employ a semiparametric smooth coefficient model to examine the effects of the introduction of the national health insurance in taiwan in 1995 on savings and consumption over the life cycle the idea is to estimate the coefficients of health insurance which vary with age our results suggest that younger households are more sensitive to the risk reductions and that they demonstrate a greater response in the reduction of their precautionary saving copyright 2004 john wiley sons ltd

estimating the effects of earnings uncertainty on families saving and insurance decisions this paper investigates whether families save partially to self insure against uncertain future earnings and estimates the extent to which pooled insurance substitutes for saving as a precaution against earnings risk an econometric model is estimated using unique household survey data from the nineteenth century to examine families joint saving and insurance decisions the historical microdata are of interest because they predate widespread social insurance programs which may stunt self insurance through private saving among contemporary families the econometric results imply that two independent measures of idiosyncratic earnings risk matter for families saving decisions additionally families whose primary wage earners belong to labor unions significantly save less frequently than others all else being equal but this tendency is not apparent among members of private benevolent societies

the evolution of wages over the lifecycle insights from intergenerational connections this article uses intergenerational information to improve our understanding of lifecycle wage dynamics i present a simple statistical model that relates the wages of workers at different points in their lifecycle to the earnings of their parents i decompose cross sectional variance of wages into a permanent component related to parental background a permanent component unrelated to parental background and a transitory component data from the panel study of income dynamics psid suggests that intergenerational relationships are stronger when measured later in the lifecycle of the son this implies that the permanent parent related component is increasingly important for wage determination as workers grow older this is not consistent with wage evolution through persistent random shocks rather it is consistent with human capital models and learning models of wage evolution

saving and liquidity constraints this paper is concerned with the theory of saving when consumers are not permitted to borrow and with the ability of such a theory to account for some of the stylized facts of saving behavior the models presented in the paper seem to account for important aspects of reality that are not explained by traditional life cycle models copyright 1991 by the econometric society

where modern macroeconomics went wrong this paper provides a critique of the dsge models that have come to dominate macroeconomics during the past quarter century it argues that at the heart of the failure were the wrong microfoundations which failed to incorporate key aspects of economic behaviour e g incorporating insights from information economics and behavioural economics inadequate modelling of the financial sector meant they were ill suited for predicting or responding to a financial crisis and a reliance on representative agent models meant they were ill suited for analysing either the role of distribution in fluctuations and crises or the consequences of fluctuations on inequality the paper proposes alternative benchmark models that may be more useful both in understanding deep downturns and responding to them

the deaton paradox in a long memory context with structural breaks this article contributes to the permanent income hypothesis pih and excess consumption smoothness debate in the context of fractional integration we show that the excess consumption smoothness result is a consequence of the quarterly data frequency commonly employed in the empirical work in fact the i 1 hypothesis is rejected for the income process with monthly data in favour of a fractional integration order lower than 1 moreover if a structural break is taken into account we observe a substantial reduction in the degree of consumption smoothness especially after the break found in 1975

the contributions of angus deaton angus deaton was awarded the 2015 sveriges riksbank prize in economic sciences in memory of alfred nobel for his analysis of consumption poverty and welfare this article reviews his contributions to economics

shocks and agricultural investment decisions abstract this study explores the impact of weather shocks on the investment decisions of farmers we distinguish between the long term effect of exposure to weather shocks measured as past exposure to deviations in average rainfall levels and the effect of weather related shocks that have recently occurred we examine how households cope with shocks in the short term in terms of consumption smoothing and the depletion of liquid assets and whether over the longer term shock exposure impacts on household investment decisions and welfare our results show that households on average manage to smooth consumption in the face of recent shocks by depleting savings and borrowing over the longer term households that are exposed to shocks invest less in productive assets leading to lower consumption levels moreover the investment strategies of these households do not appear to pay off once additional shocks occur later on

why the apple doesn t fall far understanding intergenerational transmission of human capital parents with higher education levels have children with higher education levels however is this because parental education actually changes the outcomes of children suggesting an important spillover of education policies or is it merely that more able individuals who have higher education also have more able children this paper proposes to answer this question with a unique dataset from norway using the reform of the education system that was implemented in different municipalities at different times in the 1960s as an instrument for parental education we find little evidence of a causal relationship between parents education and children s education despite significant ols relationships we find 2sls estimates that are consistently lower than the ols estimates with the only statistically significant effect being a positive relationship between mother s education and son s education these findings suggest that the high correlations between parents and children s education are due primarily to family characteristics and inherited ability and not education spillovers

health insurance liquidity and growth within the context of an endogenous growth model it is shown that in the presence of health risks which influence household income the introduction of a private insurance company increases the long term economic growth rate the introduction of such an institution has two effects on savings a level effect and a composition effect although the presence of this riskreducing institution induces a decrease in the level of total savings as suggested in earlier papers the rate of illiquid savings which contribute to growth increases

incomplete markets labor supply and capital accumulation we explore the accumulation of capital in the presence of limited insurance against idiosyncratic shocks borrowing constraints and endogenous labor supply in the exogenous labor supply case e g aiyagari 1994 huggett 1997 the presence of limited insurance increases the demand for savings for precautionary reasons as a consequence capital and output are higher under incomplete markets we show that if labor hours are endogenous labor supply is likely to be lower under incomplete markets because those agents who experience a high shock to productivity are ex post richer and they work fewer hours in some cases this wealth effect can overcome the aggregate precautionary savings and give rise to lower savings and output under incomplete

a tractable model of precautionary saving in continuous time abstract this letter derives an analytical solution to the following saving problem an individual chooses the path of consumption that maximises a time separable von neumann morgenstern utility function subject to a standard intertemporal budget constraint labour income follows a poisson process the consumer is both prudent and impatient and accumulates financial wealth as a buffer against the risk of income loss

buffer stock savings by portfolio adjustment evidence from rural india the empirical literature on household savings tends to treat savings simply as the residual of income minus consumption this article takes a unique approach to reconstruct the cash and asset balances using detailed household transaction data on farm households in rural india and generates monthly and seasonal icrisat panel data for the period 1976 1983 we have found that households irrespective of their landholding status cope with temporary shocks quite well by using crop inventory currency and capital assets rather than livestock as buffer assets the importance of portfolio adjustments in smoothing consumption is also confirmed by the use of a system of equations in which both portfolio and production decisions are made endogenous it is concluded that not only the level but also the diversification of household assets are important for buffering consumption as an extension we have explored the monthly icrisat panel data for the period 2009 2012 in the same villages and have found a similar pattern in household portfolio responses to income shocks

asset returns with transactions costs and uninsured individual risk abstract we explore whether incorporating an explicit motive for holding liquid assets within an equilibrium asset pricing model helps explain the following features of asset returns and turnover in the post war u s economy i the low risk free real interest rate ii the large spread between returns on liquid assets and stocks and iii the greater transaction velocity of liquid assets relative to stocks we introduce a demand for liquid assets by adding uninsured individual risk together with differential costs of trading securities numerical simulations attempting to match the return data generate a ratio of liquid assets to income considerably below observed levels

stock market wealth and consumer spending martha starr mccluer this article investigates the effects of stock market wealth on consumer spending traditional macroeconometric models estimate that a dollar s increase in stock wealth boosts consumption by three to seven cents with the substantial 1990s rise in stock prices the nature and magnitude of this wealth effect have been much debated after describing the issues and previous research i present new evidence from a well known consumer survey the results are broadly consistent with life cycle saving and a modest wealth effect most stockholders reported no appreciable effect of stock prices on their saving or spending but many mentioned retirement saving in explaining their behavior jel e21 e30 d12 i introduction the relationship between stock market wealth and consumer spending has been a subject of long standing interest traditional macroeconometric models estimate that a dollar s increase in household wealth boosts consumer spending by three to seven cents per year such an effect is consistent with predictions from a simple life cycle model in which consumers spend more over their lifetimes in response to higher wealth however the stock market is known to play a role as a passive predictor of information thus it is also possible that stock prices simply lead aggregate economic activity without any short run change in spending induced by changes in wealth understanding the response of spending to changes in wealth is important for determining how stock market fluctuations affect the macroeconomy the question also bears directly on theories of saving behavior and on the issue of retirement preparedness by today s workers the experience of the past few years provides an interesting opportunity to revisit this issue stock prices increased substantially in the 1990s with the standard poor s 500 more than doubling from 1994 to 1997 and rising another 44 through 1999 at the same time stock ownership broadened considerably mostly through mutual funds and retirement accounts so that a large number of households likely experienced wealth gains the increase in wealth might be expected to boost consumer spending and lower the saving rate and indeed these trends occurred however it is hard to separate the influence of the wealth effect from other factors that also would have promoted spending such as strong income growth and favorable labor market conditions this article presents some new evidence on the response of spending to changes in wealth the data come from the michigan survey research center src survey of consumers an ongoing nationally representative survey of u s households in interviews conducted between july and september 1997 households owning stock were asked special questions about their spending and saving the questions covered a number of factors that may influence the effect of wealth on spending including the value and form of stockholdings stock price expectations concerns about retirement and perceptions of income uncertainty in brief the results are broadly consistent with life cycle saving and a modest wealth effect the vast majority of stockholders reported no appreciable effect of stock prices on their spending or saving but many mentioned retirement saving in explaining their behavior the next section reviews previous research on the relationship between stock market wealth and consumer spending the third section describes the data from the michigan survey and the fourth presents the results a final section summarizes and concludes ii background and previous research to frame the discussion it is useful to review how an unexpected increase in wealth would affect consumption in a simple lifecycle model this model though restrictive in its assumptions provides valuable intuition about the propensity to consume unexpected stock gains consequences of refinements to the model are discussed below

labor market integration investment in risky human capital and fiscal competition this paper presents a general equilibrium model where human capital investment increases specialization and exposes skilled workers to region specific earnings risk interjurisdictional mobility of skilled labor mitigates these risks state contingent migration of skilled labor also improves efficiency with perfect capital markets labor market integration raises welfare and reduces ex post earnings inequality if instead human capital investment can only be financed through local taxes labor market integration leads to interjurisdictional fiscal competition shifting the burden of taxation to low skilled immobile workers decentralized public provision of human capital investment creates earnings inequalities and is inefficient

household production in the philippines a non neoclassical approach the starting point of any economic analysis is a microeconomic theory of the decision making unit by providing a set of explicit assumptions regarding individual choices a microeconomic theory lays the necessary foundation for the explanation of economic behavior just as a theory of the firm underlies analyses of market production a theory of the family underlies analyses of household production explanations of long run trends such as fertility decline grow out of assumptions regarding the nature of household decision making developing what they term the economic approach to human behavior gary becker and other neoclassical economists forcefully argue that household behavior is motivated primarily by a collective concern for economic efficiency they assume that households seek to maximize exogenously given joint utility functions and they hypothesize that differences in household behavior represent efficient responses to differences in the prices and incomes which households face this approach provides the foundation for an explanation of fertility decline based on long run changes in relative prices associated with economic development simply stated the argument runs as follows as the rate of return to human capital rises and levels of education increase the cost of rearing children goes up as higher wages draw women out of the household into the labor force the opportunity cost of mothers time goes up further increasing the cost of children the demand for children decreases and fertility levels gradually adjust 2 the assumption that joint utility functions are exogenous constant over time and vary randomly if at all across households is crucial to this argument systematic differences in unobservable joint utility functions could seriously confound the interpretation of observed relationships between changes in household behavior and changes in rela

human capital risk and economic growth this paper develops a tractable incomplete markets model of economic growth in which households invest in risk free physical capital and risky human capital the paper shows that a reduction in uninsurable idiosyncratic labor income risk decreases physical capital investment but increases human capital investment growth and welfare a quantitative analysis based on a calibrated version of the model reveals that these effects are substantial and of the same order of magnitude as the effects of distortionary income taxation the analysis further suggests that government sponsored severance payments to displaced workers increase growth and welfare even if these payments have to be e nanced through distortionary income taxation

insurance and opportunities the welfare implications of rising wage dispersion this paper develops a series of heterogeneous agents economies in order to characterize analytically the welfare implications of changes in the uncertainty in individual labor productivity we perform two types of welfare calculations first we compute the welfare consequences of a rise in labor market risk given a particular asset market structure complete markets incomplete markets autarky second we compute the expected gain from completing markets starting from autarky or incomplete markets for a given level of wage dispersion we are able to derive intuitive closed form expressions for these welfare eects which depend only on preference parameters and the size of the change in wage dispersion a higher level of productivity dispersion has always two eects it tends to reduce welfare in presence of partial insurance but it also tends to improve production opportunities in presence of flexible labor supply we can separate analytically the insurance and the opportunity components we quantify the welfare consequences of the rise in wage inequality observed in the united states over the past three decades as roughly 3 of lifetime consumption moreover we calculate that completing the asset markets given the current level of inequality would lead to a welfare improvement equivalent to 35 of lifetime consumption

evaluating seasonal food storage and credit programs in east indonesia abstract predictable annual lean seasons occur in many rural areas including west timor in indonesia imperfections in savings and credit markets make it difficult for staple farmers to convert harvest season output into lean season consumption we conduct a randomized evaluation of a seasonal food storage program and a food credit program by providing improved ways to transfer assets across seasons each program functions as a subsidy on lean season consumption we find that neither program had effects on staple food consumption the storage program increased non food consumption the credit program increased reported income and reduced seasonal gaps in consumption our results are consistent with positive income effects through the expansion of budget sets but suggest that the average household could be close to staple food satiation

national health insurance and precautionary saving evidence from taiwan abstract by reducing uncertainty about future medical expenses comprehensive health insurance can reduce households precautionary saving we examine this effect using taiwan micro data spanning the 1995 introduction of national health insurance the effects of national health insurance are identified using employment based variation in prior insurance coverage replacement of the households prior insurance coverage with national health insurance is exogenous to the household so our estimates are not subject to selection bias compared with the preceding government insurance programs national health insurance reduced saving by an average of 8 6 13 7 with the largest effects for households with the smallest saving

precautionary saving insurance and the origins of workers compensation in this article we test whether the introduction of social insurance has led to a reduction in private insurance purchases and precautionary saving by examining the introduction of workers compensation our empirical analysis is based on the financial decisions of over 7 000 households surveyed for the 1917 19 bureau of labor statistics cost of living study we find that the presence of workers compensation at least partially crowded out private accident insurance and led to a substantial reduction in precautionary saving the introduction of workers compensation caused private saving to fall by approximately 25 percent with other factors held constant

the effect of sibship size on educational attainment in china period variations in industrialized nations sibship size generally depresses educational attainment the larger the number of siblings the lower the educational attainment presumably because of the reduction of family resources both material and intellectual available to each child however this association is much less consistent in developing nations and there is some evidence of substantial change over time in this paper we study the effect of number of siblings on educational attainment in china a nation that has experienced sharp vacillations between policies designed to promote equality between urban and rural residents and between men and women and policies designed to promote economic development the implementation of these policies in the educational arena has alternately reduced and increased competition for educational resources and we show has correspondingly reduced and increased the effect of the number of children in a family on their educational attainment

the life cycle model of consumption and saving a central implication of life cycle models is that agents smooth consumption we review the empirical evidence on smoothing at frequencies from within the year up to across a lifetime we find that life cycle models particular those which incorporate realistic features of markets and goods have more empirical successes than failures we also show that some apparent deviations from theoretical predictions imply very small welfare losses for agents finally we emphasize that the coherence of life cycle models imposes an important discipline when incorporating new features into models

bounded rationality lifecycle consumption and social security abstract this paper explores an overlapping generations model of bounded rationality in which consumers only foresee the future over a subset of their life span we focus in particular on whether the model can in general equilibrium produce a hump shaped lifecycle consumption profile with a peak that matches data for the average u s consumer for a simple four period model we show that an increasing income profile along with exogenously imposed retirement are sufficient to induce a hump with no other mechanism that can account for a hump besides bounded rationality the model best fits the salient features of consumption data with a planning horizon of 20 years which is well supported by the behavioral evidence found in surveys on retirement planning finally we show that the age of the consumption peak is robust to the introduction of social security mortality risk and another species of bounded rationality quasihyperbolic discounting moreover social security can be welfare improving with a short planning horizon we can calibrate the model to jointly explain the timing of the consumption hump and the optimality of the current social security system with quasihyperbolic discounting instead we can calibrate the model so the current social security system is optimal but we cannot also account for the timing of the consumption hump if we add quasihyperbolic discounting in addition to a short planning horizon the present bias has a negligible effect in equilibrium

the impact of phasing out fossil fuel subsidies on the low carbon transition abstract there is growing consensus on the fact that fossil fuel subsidies provided by governments in high income countries represent a misalignment on emissions reduction with the global climate agenda in addition a discussion emerged on the negative socio economic and environmental externalities associated with fossil fuel subsidies nevertheless pathways for phasing out fossil fuel subsidies in high income countries and their implications on the low carbon transition have not yet been assessed with the aim to narrow this knowledge gap we extend the eirin stock flow consistent behavioral model to study the implications on sustainable development of the gradual phasing out of fossil fuels subsidies whose revenues could be used by the government to subsidize energy investments in green capital e g solar panels either via fiscal policies or green bonds we assess the effects on green growth employment credit and bonds market as well as the distributive effects across heterogeneous households and sectors a smooth phasing out of fossil fuels subsidies contributes to improve macroeconomic performance to decrease inequality and helps the government to find fiscal space to support stable renewable energy policies renewable energy subsidies contribute to foster the low carbon transition but could imply distributive effects depending on the way in which they are implemented

what accounts for the variation in retirement wealth among u s households even among households with similar socioeconomic characteristics saving and wealth vary considerably life cycle models attribute this variation to differences in time preference rates risk tolerance exposure to uncertainty relative tastes for work and leisure at advanced ages and income replacement rates these factors have testable implications concerning the relation between accumulated wealth and the shape of the consumption profile using the panel study of income dynamics and the consumer expenditure survey we find little support for these implications the data are instead consistent with rule of thumb mental accounting or hyperbolic discounting theories of wealth accumulation jel di d91 e21

consumption retirement and social security evaluating the efficiency of reform that encourages longer careers abstract this paper proposes and analyzes a social security reform in which individuals no longer face the oasi payroll tax after say age 54 or a career of 34 years and their subsequent earnings have no bearing on their benefits we first estimate parameters of a life cycle model our specification includes non separable preferences and possible disability it predicts a consumption expenditure change at retirement we use the magnitude of the expenditure change together with households retirement age decisions to identify key structural parameters the estimated magnitude of the change in consumption expenditure depends importantly on the treatment of consumption by adult children of the household simulations indicate that the reform could increase retirement ages one year or more equivalent variations could average more than 4000 per household and income tax revenues per household could increase by more than 14 000

life expectancy and old age savings rich people women and healthy people live much longer than their poor male and sick counterparts two extremes taken from our analysis of single people in the assets and health dynamics of the oldest old ahead dataset illustrate this point an unhealthy 70 year old male at the twentieth percentile of the permanent income distribution expects to live only 6 more years that is to age 76 in contrast a healthy 70 year old woman at the eightieth percentile of the permanent income distribution expects to live 16 more years thus making it to age 86 such significant differences in life expectancy could all else equal lead to significant differ ences in saving behavior a related observation is that people with high permanent incomes keep large amounts of assets until very late in life table 1 also based on the

the more the merrier the effect of family size and birth order on children s education there is an extensive theoretical literature that postulates a tradeoff between child quantity and quality within a family however there is little causal evidence that speaks to this theory using a rich dataset on the entire population of norway over an extended period of time we examine the effects of family size and birth order on the educational attainment of children while we find a negative correlation between family size and children s education when we include indicators for birth order and or use twin births as an instrument family size effects become negligible in addition birth order has a significant and large negative effect on children s education we also study adult earnings employment and teenage childbearing and find strong evidence for birth order effects with these outcomes particularly among women these findings suggest the need to revisit economic models of fertility and child production focusing not only on differences across families but differences within families as well

learning about the prospects for mobility economic and political dynamics following fundamental policy reform abstract the political left turn in latin america which lagged its transition to liberalized market economies by a decade or more challenges conventional economic explanations of voting behavior this paper generalizes the forward looking voter model to a broad range of dynamic possibly non concave income processes under full information the model implies support for redistributive policies materializes rapidly if few prospects of upward mobility are present in contrast modeling voters evolving beliefs about an unknown income dynamic process shows a slow and polarizing shift toward redistributive preferences simulation using fitted income dynamics suggests that this imperfect information perspective accounts for latin america s right to left political shift and offers additional insights about political dynamics in the face of economic polarization

noncomparable poverty comparisons poverty estimates based on enumeration from a single point in time form the basis for most country level analysis of poverty cross country comparisons of poverty and global counts of the poor implicitly assume that country level poverty headcounts are comparable this paper illustrates that the assumption of comparability is potentially invalid when households are interviewed multiple times throughout the year as opposed to a single visit interview an example from jordan illustrates how the internationally comparable approach of handling data from repeat visits yields a poverty rate that is 26 per cent greater than the rate that is currently reported as the official estimate

cyclical uncertainty precautionary saving and economic growth this paper studies the interaction between cyclical uncertainty precautionary saving and economic growth in a stochastic endogenous growth model the analysis provides insight into the potential connection between technological uncertainty of the sort popularized in real business cycle models and the determinants of economic growth in a stochastic version of a popular model of endogenously determined economic growth the magnitude of the link between cyclical uncertainty and growth is quantified and found to be small in terms of its effect on the growth rate but possibly large in terms of its effect on levels of macroeconomic variables moreover the welfare costs of reduced cyclical uncertainty can be substantial owing to the lower historical rate of capital accumulation induced by a decrease in precautionary saving the chief implications of the model are found to be roughly consistent with the postwar experience of several countries although the predictions of the model with regard to growth rates are too small to explain much of the variation in growth rates across time or across countries

the importance of the number of different agents in a heterogeneous asset pricing model abstract models with heterogeneous agents and incomplete markets often only have two types of agents to limit the computational complexity the question arises whether equilibrium models with a realistic number of types have the same implications as models with a small number of types in the asset pricing model considered in this paper several properties depend crucially on the number of types for example in the economy with only two types interest rates respond to idiosyncratic income shocks which makes it easier to smooth consumption moreover these effects can be so strong that it is possible that a relaxation of the borrowing constraint reduces an agent s utility average interest rates on the other hand are not very sensitive to the number of types

fiscal policy and asset prices with incomplete markets we study the simultaneous impact of fiscal policy decisions on macroeconomic activity wealth distribution and asset prices we consider a general equilibrium overlapping generations model with incomplete markets and heterogeneous agents where government debt and capital are imperfect substitutes increases in public debt lead to significant increases in the riskless rate and to a reduction in the equity premium while higher capital income tax rates lead to a higher equity premium the crowding out effects on capital and output are much higher than in models where government debt and capital are perfect substitutes which thus ignore households portfolio reallocation decisions the author 2012 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oup com oxford university press

the dynamic effects of firm level borrowing constraints in this paper i develop a detailed dynamic model of firm behavior in order to see whether financial constraints and endogenous exit are important propagation mechanisms to do this i construct an economy where firms face financial constraints fixed costs and persistent idiosyncratic shocks using numerical methods i analyzehowa large collection of these firmsresponds to aggregate productivity shocks a common result is that financial constraints tend to dampen the economy s initial response to aggregate productivity shocks but equity accumulation and exit dynamics amplify the longer term response the relative sizes of these two effects however are sensitive to firms environments

psychological characteristics and household savings behavior the importance of accounting for latent heterogeneity abstract we employ a finite mixture model with maximum likelihood ml estimation to analyze latent heterogeneity in the relationship between psychological characteristics and household savings behavior in a one step ml estimation approach we estimate a class membership model and a behavioral model of the classes jointly adopting this approach enables us to simultaneously assess how socio demographic characteristics affect class membership probabilities and estimate class specific regression coefficients to test whether psychological characteristics predict savings behavior differently across latent classes we apply this approach to a representative sample of uk households n 3382 and identify two different latent classes striving versus established households we find that the relationship between psychological characteristics and savings behavior differs across these two classes demonstrating the importance of accounting for latent heterogeneity when studying the drivers of savings behavior our results have implications for policymakers attempting to improve household savings behavior

the trade off between child quantity and quality an empirical investigation of trade offs between number of children and their scholastic performance confirms that family size directly affects children s achievement though parents show no favori

home is where the equity is mortgage refinancing and household consumption applying a permanent income model with exogenous liquidity constraints and mortgage behavior household refinancing when mortgage interest rates are historically high and rising a persistent empirical puzzle is explained using data from the panel study of income dynamics households experiencing an unemployment shock and having limited initial liquid assets to draw upon are shown to have been 25 more likely to refinance 1991 94 on average such liquidity constrained households converted over two thirds of every dollar of equity they removed into current consumption as mortgage rates plummeted 1991 94 producing an estimated expenditure stimulus of at least 28 billion

a reconciliation of two alternative approaches towards buffer stock saving this paper shows that the two main models in the buffer stock saving literature can be nested in a model that varies the level of available social insurance equivalently the assumption about the time series process for labor income and social insurance during unemployment is crucial in determining the level but not the shape of optimal consumption as a function of liquid wealth

superior information income shocks and the permanent income hypothesis according to the permanent income hypothesis with quadratic preferences households save for a rainy day the transitory component of income innovations and consume entirely the permanent one the m

interest rates in a credit constrained economy when households face credit constraints in an economy with inside as well as outside money stationary equilibrium real interest rates are below the household rate of time preference they also depend significantly upon household risk aversion the demand for inside versus outside money bank costs bank reserves inflation and the marginal productivity of capital and capital depreciation rates in addition changes in financial variables affect per capita capital and output to a greater extent when households are credit constrained copyright 1994 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

effects of transitory shocks to aggregate output on consumption in poor countries this paper provides instrumental variables estimates of the response of aggregate private consumption to transitory output shocks in poor countries to identify exogenous unanticipated idiosyncratic and transitory variations in national output we use year to year variations in rainfall as an instrumental variable in a panel of 39 sub saharan african countries during the period 1980 2009 our estimates yield a marginal propensity to consume out of transitory output of around 0 2 to explain this result we show using instrumental variables techniques that there is a significant negative effect of transitory output shocks on net current transfers and a significant positive and quantitatively large effect on the trade balance an important implication is that frictions to private financial flows do not necessarily imply large effects of transitory shocks to aggregate output on private consumption in poor countries