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Does the Consumption of Different Age Groups Move Together? A New Nonparametric Test of Intergenerational Altruism

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  • Andrew B. Abel
  • Laurence J. Kotlikoff

Abstract

In recent years Robert Barro's (1974) ingenious model of inter- generational altruism has taken its place among the major theories of consumption and saving. Despite its policy importance, there have been few direct tests of the Barro model. This paper presents a new direct test that is based on a property of the Barro model that, to our knowledge, has not previously been exploited. This property is that the Euler errors (i.e., disturbances in the Euler equations) of altruistically linked members of Barro extended families (clans) are identical. Under time-separable, homothetic utility, this equality of Euler errors means that, controlling for clan preferences about the age distribution of consumption, the percentage changes over time in consumption of all Barro clan members are equal. With some weak additional assumptions, this proposition implies that the average percentage change in household consumption within an age cohort should be the same for all age cohorts. Testing the Barro model by comparing average percentage changes in consumption across age cohorts is particularly advantageous because it is nonparametric; in determining whether the average consumptions of different age cohorts move together we place no restrictions on preferences beyond the assumptions of homotheticity and time separability. In particular, each Barro clan can have quite different preference parameters. The new quarterly Consumer Expenditure Surveys (CES) covering 1980 through the first quarter of 1985 are an excellent data set for determining whether the consumption of different age groups moves together. The CES records the consumption of each sample household for up to four quarters, and thus can be used to determine the average quarterly percentage change in consumption of households in a given age group. The null hypothesis of our test is that cohort differences in the average percentage change in consumption are due simply to sampling and measurement error. Alternative hypotheses, suggested by the Life Cycle Model, are that (1) the percentage changes in the average consumptions of any two cohorts are more highly correlated the closer in age are the two cohorts, and (2) the variance in the percentage change in consumption is a monotone function of the age of the cohort. The data fail to reject the null hypothesis of equal Euler errors. Indeed, the results provide fairly strong support for the intergenerational altruism model as opposed to the Life Cycle Model.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2490.

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Date of creation: Jan 1988
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Publication status: published as "Intergenerational Altruism and the Effectiveness of Fiscal Policy- New Tests Based on Cohort Data", in Toshiaki Tachibanaki, ed., Savings and Bequests, (Ann Arbor: University of Michigan Press: 1994), pp. 167-196
Handle: RePEc:nbr:nberwo:2490

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  1. Stephen P. Zeldes, . "Consumption and Liquidity Constraints: An Empirical Investigation," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 16-88, Wharton School Rodney L. White Center for Financial Research.
  2. Alan J. Auerbach & Laurence J. Kotlikoff, 1981. "An Examination of Empirical Tests of Social Security and Savings," NBER Working Papers 0730, National Bureau of Economic Research, Inc.
  3. West, Kenneth D., 1988. "The insensitivity of consumption to news about income," Journal of Monetary Economics, Elsevier, Elsevier, vol. 21(1), pages 17-33, January.
  4. B. Douglas Bernheim & Kyle Bagwell, 1989. "Is Everything Neutral?," NBER Working Papers 2086, National Bureau of Economic Research, Inc.
  5. Feldstein, Martin S, 1974. "Social Security, Induced Retirement, and Aggregate Capital Accumulation," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 82(5), pages 905-26, Sept./Oct.
  6. Barro, Robert J., 1974. "Are Government Bonds Net Wealth?," Scholarly Articles 3451399, Harvard University Department of Economics.
  7. Kormendi, Roger C, 1983. "Government Debt, Government Spending, and Private Sector Behavior," American Economic Review, American Economic Association, American Economic Association, vol. 73(5), pages 994-1010, December.
  8. Miron, Jeffrey A, 1986. "Seasonal Fluctuations and the Life Cycle-Permanent Income Model of Consumption," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 94(6), pages 1258-79, December.
  9. Aschauer, David Alan, 1985. "Fiscal Policy and Aggregate Demand," American Economic Review, American Economic Association, American Economic Association, vol. 75(1), pages 117-27, March.
  10. Williamson, Samuel H & Jones, Warren L, 1983. "Computing the Impact of Social Security Using the Life Cycle Consumption Function," American Economic Review, American Economic Association, American Economic Association, vol. 73(5), pages 1036-52, December.
  11. Mankiw, N Gregory & Rotemberg, Julio J & Summers, Lawrence H, 1985. "Intertemporal Substitution in Macroeconomics," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 100(1), pages 225-51, February.
  12. Flavin, Marjorie A, 1981. "The Adjustment of Consumption to Changing Expectations about Future Income," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 89(5), pages 974-1009, October.
  13. Shapiro, Matthew D., 1984. "The permanent income hypothesis and the real interest rate : Some evidence from panel data," Economics Letters, Elsevier, Elsevier, vol. 14(1), pages 93-100.
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Cited by:
  1. John H. Cochrane, 1988. "A Test of Consumption Insurance," NBER Working Papers 2642, National Bureau of Economic Research, Inc.
  2. Francesco Busato & Bruno Chiarini & Elisabetta Marzano, 2006. "Consumption and Income Smoothing," Discussion Papers, D.E.S. (Department of Economic Studies), University of Naples "Parthenope", Italy 13_2006, D.E.S. (Department of Economic Studies), University of Naples "Parthenope", Italy.
  3. David Altig & Steve J. Davis, 1991. "The Timing of Intergenerational Transfers, Tax Policy, and Aggregate Savings," NBER Working Papers 3753, National Bureau of Economic Research, Inc.
  4. Ralph Chami & Connel Fullenkamp & Samir Jahjah, 2005. "Are Immigrant Remittance Flows a Source of Capital for Development?," IMF Staff Papers, Palgrave Macmillan, vol. 52(1), pages 55-81, April.
  5. Joseph G. Altonji & Fumio Hayashi & Laurence J. Kotlikoff, 1989. "Is the Extended Family Altruistically Linked? Direct Tests Using Micro Data," NBER Working Papers 3046, National Bureau of Economic Research, Inc.
  6. Jacques Bouhga-Hagbe, 2006. "Altruism and Workers' Remittances," IMF Working Papers 06/130, International Monetary Fund.
  7. Arrau, Patricio, 1990. "How does the debt crisis affect investment and growth? : a neoclassical growth model applied to Mexico," Policy Research Working Paper Series 378, The World Bank.

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