Household saving behavior, portfolio choice and children : evidence from the Survey of consumer finances

Using the Survey of Consumer Finances (SCF), this dissertation examines the relationship between having 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. The first chapter examines how the number of children living in the household affects the way households allocate their wealth across different assets, such as owner-occupied housing, risky assets and interest-bearing accounts. 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 results show that the number of children increases the housing consumption of homeowners and the share of the portfolio allocated to owner-occupied housing. As a result of the portfolio constraint, homeowners decrease the share of the portfolio invested in retirement assets as the number of children increases. Using a life-cycle model that incorporates precautionary motives for saving, the second chapter investigates the relationship between household saving and fertility decisions. By examining the implications of income uncertainty on the demand for children, this chapter extends the empirical work on precautionary savings. The results show that households with higher income uncertainty are less likely to have a child, and after controlling for family size, income uncertainty has little effect on household savings. Further, having an additional child reduces savings of households with young heads and increases savings of those with older heads. The third chapter examines the effect of financing children’s college education on household savings. Using the actual college expenditures reported in the 1983-86 SCF, the empirical model estimates the expected expenditures on children’s college education and investigates the effect of expected college expenses on household savings. The results show that parents save for college expenses of their children. Also, savings for college increase with the age of the household head. The results are consistent with the predictions the lifecycle theory of saving that households save in advance for expected expenses to smooth their consumption.