This paper reports measures of preference parameters relating to risk tolerance, time preference, and intertemporal substitution. These measures are based on survey responses to hypothetical situations constructed using an economic theorist's concept of the underlying parameters. The individual measures of preference parameters display heterogeneity. Estimated risk tolerance and the elasticity of intertemporal substitution are essentially uncorrelated across individuals. Measured risk tolerance is positively related to risky behaviors, including smoking, drinking, failing to have insurance, and holding stocks rather than Treasury bills. These relationships are both statistically and quantitatively significant, although measured risk tolerance explains only a small fraction of the variation of the studied behaviors. Robert B. Barsky F. Thomas Juster Miles S. Kimball Matthew D. Shapiro Survey Research Center and Department of Economics University of Michigan Ann Arbor, MI 48109 tel. 313 ...

This paper argues that the typical household’s saving is better described by a “bufferstock” version than by the traditional version of the Life Cycle/Permanent Income Hypothesis (LC/PIH) model. Buffer-stock behavior emerges if consumers with important income uncertainty are sufficiently impatient. In the traditional model, consumption growth is determined solely by tastes; in contrast, buffer-stock consumers set average consumption growth equal to average labor income growth, regardless of tastes. The model can explain three empirical puzzles: the “consumption/income parallel ” of Carroll and Summers [1991]; the “consumption/income divergence ” first documented in the 1930's; and the temporal stability of the household age/wealth profile despite the unpredictability of idiosyncratic wealth changes.

I develop a general equilibrium model with sticky prices, credit constraints, nominal loans and asset prices. Changes in asset prices modify agents ’ borrowing capacity through collateral value; changes in nominal prices affect real repayments through debt deflation. Monetary policy shocks move asset and nominal prices in the same direction, and are amplified and propagated over time. The “financial accelerator ” is not constant across shocks: nominal debt stabilises supply shocks, making the economy less volatile when the central bank controls the interest rate. I discuss the role of equity, debt indexation and household and firm leverage in the propagation mechanism. Finally, I find that monetary policy should not target asset prices as a means of reducing output and inflation volatility. “The population is not distributed between debtors and creditors randomly. Debtors have borrowed for good reasons, most of which indicate a high marginal propensity to spend from wealth or from current income or from any other liquid resources they can command. Typically their indebtedness is rationed by lenders [...] Business borrowers typically have a strong propensity to hold physical capital, producers ’ durable goods. Their desired portfolios contain more capital than their net worth — they like to take risks with other people’s money. Household debtors are frequently young families acquiring homes and furnishings before they earn incomes to pay for them outright; given the difficulty of borrowing against future wages, they are liquidity-constrained and have a high marginal propensity to consume ” (James Tobin, “Asset Accumulation and Economic Activity”, 1980)

This paper uses the Panel Study of Income Dynamics to provide some of the first direct evidence that wealth is systematically higher for consumers with predictably greater income uncertainty. However, the apparent pattern of precautionary wealth is not consistent with a standard parameterization of the life cycle model in which consumers are patient enough to begin saving for retirement early in life: wealth is estimated to be far less sensitive to uncertainty than implied by that model. Instead, our results suggest that over most of their working lifetime, consumers behave in accordance with the "buffer-stock" models of saving described in Carroll (1992, 1997) or Deaton (1991), in which consumers hold wealth principally to insulate consumption against near-term fluctuations in income. JEL Classification: D91, E21

The paper reviews the literature on the impact of school resources on earnings and educational attainment. Three strong patterns characterize the existing research. First, papers which find no significant effect of school inputs on outcomes tend to examine resources at the school actually attended, while papers which do find an effect typically use average school inputs by state. The other two patterns have to do with time/age effects: papers which find no link also typically examine workers who were educated between 1960 and the early 1980's, and who were 32 or younger at the time of the wage observation. Papers which do find a link most frequently study older workers who were educated in the first half of the century. Similar patterns emerge in the literature on educational attainment and school resources, although the literature is surprisingly small. Five sets of hypotheses to explain these patterns are examined: 1) structural change, 2) age-dependence of the relation between schoo...

This paper shows that standard empirical methods for estimating log-linearized consumption Euler equations cannot successfully uncover structural parameters like the coe#cient of relative risk aversion from a dataset of simulated consumers behaving exactly according to the standard model. Furthermore, consumption growth for the simulated consumers is very highly statistically related to predictable income growth -- and thus standard `excess sensitivity' tests would reject the hypothesis that consumers are behaving according to the standard model. Results are not much better for the second-order approximation to the Euler equation. The paper concludes that empirical estimation of consumption Euler equations should be abandoned, and discusses some alternative empirical strategies that are not subject to the problems of Euler equation estimation. Keywords: Euler equation, uncertainty, consumption, excess sensitivity JEL Classification Codes: C6, D91, E21 + Department of Economics, John...

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This paper explores the household behavior that underlies the link between wealth and consumption at the aggregate level. One possibility is that changes in wealth directly cause changes in consumption through their effect on households ’ contemporaneous budget sets; another possibility is that they merely predict changes in consumption because they signal changes in future income. Previous attempts to assess the relative importance of these “direct” and “indirect ” channels have yielded indeterminate results. Based on analysis of householdlevel data from the Consumer Expenditure Survey, we find that direct wealth effects begin to show up relatively quickly and continue to boost consumption growth for a number of quarters, in line with aggregate estimates. In contrast, we find that the indirect wealth channel is not an important determinant of consumption growth. We also estimate that an additional dollar of wealth leads households with moderate securities holdings to increase consumption between 5 cents and 15 cents, with the most likely gain in the lower part of this range. Much of this paper was completed while Maki was an economist at the Federal Reserve Board. We wish to thank Byron Lutz, Shital Patel, and Richard Saouma for excellent research assistance

errors are mine. Endogenous Lifetime and Economic Growth Conventional wisdom attributes the severity of mortality in poorer countries to widespread poverty and inadequate living conditions. This paper considers the possibility that persistent poverty may arise, in turn, from a high incidence of mortality. Endogenous mortality risk is introduced in a two-period overlapping generations model: probability of survival from the ¯rst period to the next depends upon health capital that can be augmented through public investment. High mortality societies do not grow fast since shorter lifespans discourage saving and investment; multiple steady-states are possible. High mortality also reduces returns on investments, like education, where risks are undiversi¯able. When human capital drives economic growth, countries di®ering in only health capital do not converge to similar living standards; `threshold e®ects ' may also result.

for many helpful suggestions. Gale thanks the National Institute on Aging for financial support. The opinions presented are our own and should not be ascribed to the officers, trustees, or staff We examine patterns and correlates of asset accumulation among low-income households and other demographic groups using a series of cross-sections from the Survey of Income and Program Participation. We find that 20 percent of American households, including 45 percent of black households, do not maintain a transactions account. In addition, households in the bottom half of the income distribution maintain tend to maintain very low discretionary financial asset holdings. Our regression analysis suggests that income, age, education and marital status are significantly correlated with the level of net worth and financial assets. However, despite controlling for a series of other variables, we find that black households and those who receive public assistance have lower wealth than others. Examining net worth versus financial assets revealed somewhat different patterns of accumulation. This suggests that the process by which these two are accumulated may be different, at least for lower-income households. We also show that, controlling for other factors, not having a transaction account is correlated with