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Liquidity Constraints, the Extended Family, and Consumption

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Abstract

This study examines whether the extended family influences consumption. Extending prior tests on food consumption to total consumption, little to no evidence is found in support of altruism among related households and or that fluctuations in dynastic income affects one’s own consumption. However, the effect of transitory fluctuations in own income on consumption are contingent on own wealth and the wealth of the extended family, with estimates of the marginal propensity to consume roughly three times higher for individuals whose own and extended family wealth is low versus individuals whose own and extended family wealth is high.

Key Findings

• Despite widespread anecdotal evidence of beneficence, empirical tests have rejected altruism as a motivation for behavior. However, economic models also suggest that individuals save in order to smooth consumption and cope with declines in income. A negative shock need not necessitate assistance from family if individuals have their own wealth holdings or have access to credit.

• A rigorous test would be based on changes in consumption. Our estimates using comprehensive information on consumption from 1999-2011 imply similar qualitative conclusions about altruism; we reject the predictions of the strict altruism model.

• However, the estimates from the static and dynamic models taken together imply suggestive evidence in favor of effects of dynastic income on own consumption.

• We go on to test whether the response of own consumption to changes in transitory income is dependent on not only one’s own wealth, but the wealth of the extended family. We find some evidence indicating that the effect of transitory income on consumption is influenced by the level of wealth held by extended family members.

Citation

Choi, HwaJung, Kathleen McGarry, and Robert F. Schoeni. "Liquidity Constraints, the Extended Family, and Consumption." University of Michigan Retirement Research Center (MRRC) Working Paper, WP 2015-320. Ann Arbor, MI. https://mrdrc.isr.umich.edu/publications/papers/pdf/wp320.pdf

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Project

Paper ID

WP 2015-320

Publication Type

Working Paper

Publication Year

2015