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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.

Suggested Citation

  • Andrew B. Abel & Laurence J. Kotlikoff, 1988. "Does the Consumption of Different Age Groups Move Together? A New Nonparametric Test of Intergenerational Altruism," NBER Working Papers 2490, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:2490
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    2. Altonji, Joseph G & Hayashi, Fumio & Kotlikoff, Laurence J, 1992. "Is the Extended Family Altruistically Linked? Direct Tests Using Micro Data," American Economic Review, American Economic Association, vol. 82(5), pages 1177-1198, December.
    3. McCarthy, Jonathan, 1995. "Imperfect insurance and differing propensities to consume across households," Journal of Monetary Economics, Elsevier, vol. 36(2), pages 301-327, November.
    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. repec:thr:techub:1008:y:2020:i:1:p:229-248 is not listed on IDEAS
    6. Jasmina Hasanhodzic & Laurence J. Kotlikoff, 2013. "Generational Risk–Is It a Big Deal?: Simulating an 80-Period OLG Model with Aggregate Shocks," BYU Macroeconomics and Computational Laboratory Working Paper Series 2013-01, Brigham Young University, Department of Economics, BYU Macroeconomics and Computational Laboratory.
    7. Altig, David & Davis, Steven J, 1992. "The Timing of Intergenerational Transfers, Tax Policy, and Aggregate Savings," American Economic Review, American Economic Association, vol. 82(5), pages 1199-1220, December.
    8. Lili Zheng & Yuan Lu, 2020. "Health Human Capital Investment and Economic Growth," Technium Social Sciences Journal, Technium Science, vol. 8(1), pages 229-248, June.
    9. John H. Cochrane, 1988. "A Test of Consumption Insurance," NBER Working Papers 2642, National Bureau of Economic Research, Inc.
    10. 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.
    11. International Monetary Fund, 2004. "Morocco: Selected Issues," IMF Staff Country Reports 2004/164, International Monetary Fund.
    12. Syeda Fizza Gillani, 1996. "Risk-sharing in Rural Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 35(1), pages 23-48.
    13. Mr. Jacques Bouhga-Hagbe, 2006. "Altruism and Workers’ Remittances: Evidence from Selected Countries in the Middle East and Central Asia," IMF Working Papers 2006/130, International Monetary Fund.

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