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Bequest motives and household money demand

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Abstract

The bequest motive is an important motive determining intergenerational transfers of income, saving, and money. However, it has received little or no attention from past studies on money demand. This study utilizes panel data to show that the bequest motive is positively related to money demand and interacts with the life-cycle motive during various stages of an individual’s life. Householders with bequest motives are more likely to transfer a greater proportion of their permanent incomes to monetary assets than those without bequest motives.

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Notes

  1. The study by Browning and Lusardi (1996) contains an excellent survey of the literature on household life-cycle savings, while a survey of the literature on bequest motives and inheritance is provided by Masson and Pestieau (1997).

  2. It should be noted that in his restatement of the quantity theory of money Friedman (1956) did not raise any objection to the Keynesian notion that money-holders demand money partly from the transactions motive and partly from the precautionary, speculative, or asset motive. Indeed, Friedman’s concept of money as a “temporary abode of purchasing power” may be viewed as the monetarist counterpart of the Keynesian precautionary money demand, as depicted in the buffer stock model of money demand.

  3. General Theory, pp. 107–109, 166.

  4. SIPP samples in each wave are usually divided into four rotation groups of similar sizes and from each rotation group four reference months of data are collected. In the interview assigned for each rotation, respondents are asked to provide information for the previous four months or reference periods. The last day of the reference period refers to the last day of the most recent month prior to the interview. In this study, regression results are generated by data obtained from the fourth reference month of waves 3, 6, and 9. The 2001 SIPP documents and data files can be obtained from the Census Bureau’s web site: <www.sipp.census.gov/sipp/>.

  5. As shown by Bernheim et al (1985), the bequest motive of a householder may not be altruistic if there exists an exchange of services among family members.

  6. Three waves of data are used to capture the existence of a bequest motive so that those with a bequest motive but could not afford the premiums in one or two waves can be included in the analysis. Those who had life insurances prior to wave 3 but were no longer covered in waves 3, 6, or 9 are given a value of zero because of the lack of historical data. Similarly, those who did not have life insurances in waves 3, 6, and 9 but had life insurances thereafter are given a value of zero because of data limitations.

  7. The 2001 SIPP panel only contains information on the gross return and the gross amount of these assets held at financial institutions. As a result, the rate of return on each of these assets can not be dis-aggregated for further analysis.

  8. As pointed out by Browning and Lusardi, although age and age square are often included in past studies to capture the life-cycle motive, life-cycle choices about education, marriage, and childbearing are also inseparable parts of the life-cycle framework.

  9. Types of occupation, housing tenure status, and regional differences are included as instrumental variables, primarily because, after repeated trials, they appear to be correlated with the endogenous variables, especially with permanent income. Additionally when the number of instrumental variables is equal to or a subset of the number of demographic variables representing the life-cycle motive in the money demand equation, the problem of multi-collinearity becomes serious and renders most parametric estimates meaningless. Life insurance coverage is not used as an instrumental variable so that the effect of multi-collinearity on the coefficient of the bequest motive can be minimized.

  10. The sign of the bequest motive is negative, probably because households covered by life insurances had to pay premiums, whereas households without life insurance coverage did not have to make such payments.

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Acknowledgement

The author is indebted to an anonymous referee for many valuable comments. The views expressed here are those of the author and do not reflect those of the U. S. Commerce Department or the Census Bureau.

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  1. U.S. Bureau of the Census, 6066 Oust Lane, Woodbridge, VA, 22193, USA

    Jan Tin

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Tin, J. Bequest motives and household money demand. J Econ Finan 34, 269–283 (2010). https://doi.org/10.1007/s12197-009-9079-1

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