IDEAS home Printed from https://ideas.repec.org/p/zbw/bubdps/212012.html
   My bibliography  Save this paper

Saving and learning: Theory and evidence from saving for child's college

Author

Listed:
  • Zhu, Junyi

Abstract

This paper analyzes the main uncertainty of college saving - the child's ability - in the context of the saving with learning model. The first section develops a dynamic model combining asset accumulation and learning to explain the parents' forward-looking saving behavior when they are confronted with the real option of college choice due to uncertainty of their child's ability. The model infers that, with enough time spent learning, information can improve parents' welfare. This can be accomplished by improving the allocation of the consumption to accommodate the burden of college cost given both asset status and the child's true ability. Next, I test the implications of the model from the Panel Study of Income Dynamics/Child Development Supplement & Transition into Adulthood (PSID/CDS & TA) (1997-2005) in the second section. This empirical study investigates college saving behavior when learning is present. Data suggest pessimistic and/or rich parents might reduce the level of college saving, which confirms the interaction of wealth and learning effects predicted by this model. The result also supports the state dependence of parents' college expectations and diminishing persistence over time due to learning. Finally, a number of policy improvements on ESA (Education Saving Account) are proposed to encourage parents to learn about their childs ability.

Suggested Citation

  • Zhu, Junyi, 2012. "Saving and learning: Theory and evidence from saving for child's college," Discussion Papers 21/2012, Deutsche Bundesbank.
  • Handle: RePEc:zbw:bubdps:212012
    as

    Download full text from publisher

    File URL: https://www.econstor.eu/bitstream/10419/64817/1/726797413.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Keane, Michael P, 1994. "A Computationally Practical Simulation Estimator for Panel Data," Econometrica, Econometric Society, vol. 62(1), pages 95-116, January.
    2. Jovanovic, Boyan, 1979. "Job Matching and the Theory of Turnover," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 972-990, October.
    3. Hakansson, Nils H, 1970. "Optimal Investment and Consumption Strategies Under Risk for a Class of Utility Functions," Econometrica, Econometric Society, vol. 38(5), pages 587-607, September.
    4. Keane, Michael P & Wolpin, Kenneth I, 2001. "The Effect of Parental Transfers and Borrowing Constraints on Educational Attainment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(4), pages 1051-1103, November.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    education saving; search; learning; intertemporal consumption; real option; dynamic panel;

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • I22 - Health, Education, and Welfare - - Education - - - Educational Finance; Financial Aid

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:zbw:bubdps:212012. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (ZBW - German National Library of Economics). General contact details of provider: http://edirc.repec.org/data/dbbgvde.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.