As the workhorse of consumption and saving research for the past four decades, the life-cycle model has proved flexible and useful for examining a variety of questions. In a classic paper, Albert Ando and Franco Modigliani (1963 p. 56) stated a key assumption of the basic model: “[t]he individual neither expects to receive nor desires to leave any inheritance.” Although the authors contended that the absence of a bequest motive was not critical to the heart of their results, the assumption set off a long-standing battle over the relative importance of different motives for saving. In an influential study, Laurence Kotlikoff and Laurence Summers (1981) estimated that a large fraction of the U.S. capital stock was attributable to intergenerational transfers. Modigliani and his collaborators vigorously disagreed and, based on their own empirical work, claimed that life-cycle saving was the primary source of capital accumulation (Modigliani, 1988). Subsequent work has failed to reach a consensus.1 Since this debate began, an important advance in the consumption literature has been the incorporation of uncertainty in life-cycle models (see e.g., R. Glenn Hubbard et al., 1995). We argue that allowing for uncertainty resolves the controversy over the importance of life-cycle and bequest saving by showing that these motives for saving are overlapping and cannot generally be distinguished. A dollar saved today simultaneously serves both a precautionary life-cycle function (guarding against future contingencies such as health shocks or other emergencies) and a bequest function because, in the likely event that the dollar is not absorbed by these contingencies, it will be available to bequeath to children or other worthy causes. Under this view, households have a bequest motive, but bequests are given (i.e., the motive is “operative”) in only some states of the world.2 Wealth is something like traveler’s checks: you take them along on vacation “just in case,” but odds are they will remain uncashed and available for sundry goods after the journey is complete. We first demonstrate the result using a simple model and then argue that this approach reconciles the apparent importance of bequests with households’ declared focus on life-cycle saving. Finally, we consider implications of our analysis.
Finance companies are important providers of credit to households and businesses. For households, they originate loans and leases to finance the purchase of consumer goods such as automobiles, furniture, and household appliances; they also extend personal cash loans and loans secured by junior liens on real estate, such as home equity loans. For businesses, they supply short- and intermediate-term credit (including leases) for such purposes as the purchase of equipment and motor vehicles and the financing of inventories.
With roughly $1 trillion in financial assets as of mid-2000, the finance company sector occupies an intermediate position among the sectors that typically lend to households and businesses: In terms of assets, it is more than twice as large as the credit union sector, about the same size as the thrift sector, but only about one-fifth as large as the commercial banking sector. The approximately 1,000 companies that make up the sector (down from about 1,200 in 1996) range in size from very small to very large and include the ''captive'' subsidiary finance companies of motor vehicle manufacturers. The companies tend to be diversified, with more than 90 percent of the sector's assets as of mid-2000 held by companies that did not concentrate in any one type of receivable. The larger firms are more likely to be diversified; of the small firms that specialize, most focus on short- and intermediate-term business receivables. The sector is quite concentrated, and has been for some time, with the twenty largest companies accounting for more than two-thirds of total receivables (see box "Industry Concentration'').
The Federal Reserve System has surveyed the assets and liabilities of finance companies at roughly five-year intervals since 1955. The surveys provide benchmarks for the System's monthly report on the outstanding accounts receivable of finance companies and provide a comprehensive update on these companies' sources of funds. This information in turn becomes an important input to the estimates of total consumer credit and the U.S. flow of funds accounts produced at the Federal Reserve Board. Summarized in this article are the results of the most recent survey, which collected finance company balance sheet information as of June 30, 2000. (Details on sampling procedures are given in appendix A, and complete balance sheet data are provided in table B.1.)
This paper tests for the presence of habit formation using household data. A simple model of habit formation implies a condition relating the strength of habits to the evolution of consumption over time. When the condition is estimated with food consumption data from the Panel Study on Income Dynamics (PSID), the results yield no evidence of habit formation at the annual frequency. This finding is robust to a number of changes in the specification. It also holds for several proxies for nondurables and services consumption created by combining PSID variables with weights estimated from Consumer Expenditure Survey data.
Using data from the Consumer Expenditure Survey, this paper pre sents a simple test that provides an explicit estimate of the parameter in the utility function that reflects the strength of the precautionary saving motive, the coefficient of relative prudence. The test yields a fairly precise estimate of a small precautionary motive; in fact, the estimate is too small to be consistent with widely accepted beliefs about risk aversion. The presence of liquidity-constrained house holds does not appear to explain this finding, and there is some evidence that self-selection of households into risky environments also cannot explain the results.