Three Essays on the Economics of Household Decision Making DISSERTATION Presented in Partial Fulfillment of the Requirements for the Degree Doctor of Philosophy in the Graduate School of The Ohio State University By Vipul Bhatt, B.A., M.A. Graduate Program in Economics The Ohio State University 2010 Dissertation Committee: Pok-sang Lam, Adviser Masao Ogaki, Co-adviser David Blau Paul Evans c Copyright by Vipul Bhatt 2010 Abstract My research emphasizes the role of interrelated preferences in determining economic choices within a household. In this regard, I study both intergenerational interactions (between parents and children) and intragenerational interactions (between spouses). These linkages have important implications on individual economic behavior such as savings, labor supply, investment in human capital, and bequests which in turn affects aggregate savings and growth. Standard altruism models developed by Barro and Becker are based on an important assumption that parents and children have homogeneous discount factors, which precludes any role parents can play in influencing their child’s time preferences. However, there is empirical evidence that parents attempt to shape their children’s attitudes. The first essay of my dissertation, “Tough Love and Intergenerational Altru- ism” (based on this I also have a joint work with Masao Ogaki), proposes a framework to study the role of parents in shaping children’s time preferences. The tough love altruism model modifies the standard altruism model in two ways. First, the child’s discount factor is endogenously determined so that low consumption at young ages leads to a higher discount factor later in her life. Second, the parent evaluates the child’s lifetime utility with a constant high discount factor. In contrast to the predictions of the standard model that transfers are independent of exogenous changes in the child’s discount factor, the tough love altruism model predicts that transfers from the parent will fall when the child’s discount factor falls. Thus, our model is more consistent with empirical evi- dence on parental punishments than the standard altruism model. The second essay, “Adolescent Substance Use and Intergenerational Transfers: Evidence from Micro Data,” provides empirical ii evidence for the use of pecuniary incentives by the parent to influence child behavior. Using the first seven waves of the National Longitudinal Survey of Youth, 1997 (NLSY97), I measure the ef- fect of child alcohol consumption on parental transfers. Owing to the plausible endogeneity of the child’s alcohol use in the regression equation of transfers she receives from parents, I estimate this relationship using an instrumental variable which utilizes variation in the price of alcoholic bever- ages over time and across states as a source of exogenous variation. The main finding of the paper is that after accounting for the possible endogeneity of substance use, the incidence of alcohol con- sumption among youths significantly reduces the amount of parental transfers they receive. Given the robust evidence for a negative correlation between youth substance use and their discount fac- tor in the economics and psychology literature, this result provides an empirical basis for the tough love model of intergenerational altruism. The existing literature on joint retirement suggests that married couples tend to coordinate their retirement decisions which seem to be largely explained by the complementarity in their preferences for leisure. However, the recent trend toward increased labor force participation of older married women may make synchronization of retirement deci- sions more difficult as more recent cohorts of women become more strongly attached to the labor force and build their own careers, a fact that has been overlooked in the literature. My third essay, “Cross-Cohort Differences in Joint Retirement: Evidence from the Health and Retirement Study,” uses the Health and Retirement Study (HRS) data from 1992 through 2006 to document that the likelihood of a married couple jointly exiting the labor force (given that both were employed in the previous period) decreases across successive birth cohorts of wives. I then estimate a discrete choice multinomial model of labor force transition for married couples and find that, while eco- nomic factors have substantial power in explaining variation across married couples in retirement behavior, trends across cohorts in these factors do not contribute significantly towards explaining the observed cohort trend in joint retirement. This result suggests that non-economic factors, such iii as changes in social norms and attitudes towards work, are likely to be more important explana- tions for this observed trend. From a policy perspective, an implication of this finding is that the bias in the estimated effect of a policy aimed at influencing older workers’ labor force behavior (caused by ignoring potential interactions in retirement decisions of spouses) can be mitigated if recent cohorts are less likely to retire together. iv ACKNOWLEDGMENTS I would like to thank Masao Ogaki for his advice, encouragement, and support towards the completion of this dissertation. His work ethics and discipline are a constant source of inspiration for me and he has contributed greatly in improving my understanding of how to conduct inde- pendent research. Pok-sang Lam has mentored me from the beginning of my research and also supported me financially for two quarters as his research assistant, and I am thankful to him for the role he has played in shaping my research. I am grateful for the feedback and participation of my committee members. David Blau is instrumental in shaping my research interests in the area of labor economics. His encouragement and guidance has helped me cross the disciplinary boundary between Macroeconomics and Labor Economics. I have benefited greatly from my discussions with Paul Evans whose knowledge of the subject of Economics as a whole is awe-inspiring. I have gained significantly from his lucid explanations on a wide range of topics both inside and outside the class room. I am grateful to Bruce Weinberg and Audrey Light for their insightful comments and sugges- tions on my research throughout my stay at the Ohio State University. I also want to thank my friend, Kent Zhao, for numerous discussions on computational economics methods and research in general. v Last, but most important, I thank my family for their love and support. I am exceptionally grateful to my parents for all the hard work they had to endure to provide me a good education. My wife, Mithuna was a constant source of encouragement and support. Her contribution towards the completion of my dissertation is immense and I am grateful for her suggestions, ideas and time. vi VITA October 21, 1978 ··························· Born at Delhi, India 1999 ··························· B.A. (Honors) in Economics, University of Delhi, India 2001 ··························· M.A. in Economics, Delhi School of Economics, India 2005 ··························· M.A. in Economics, The Ohio State University, USA 2005-Present ··························· Graduate Teaching Associate, The Ohio State University, USA PUBLICATIONS • Bhatt, Vipul and Ogaki Masao. 2009. “Tough Love, Intergenerational Altruism, and Worldviews” (with Masao Ogaki), Journal of Behavioral Economics and Finance, Vol.2. • Virmani,Arvind, Goldar,B., N., Veeramani, C., and Bhatt, Vipul. 2006. “Impact of Tariff Reforms on Indian Industry: Assessment based on a Multi-sector Econometric Model”. Published in Propelling India from Socialist Stagnation to Global Power, Volume 1: Growth Process by Arvind Virmani, Academic Foundation. FIELD OF STUDY • Major Field: Economics • Areas of Specialization: Macroeconomics, Labor Economics, Applied Econometrics, Household Behavior and Family Economics vii Contents Page Abstract . ii Acknowledgments . .v Vita ............................................... vii List of Tables . .x List of Figures . xii Chapters: 1. Adolescent Substance Use and Intergenerational Transfers: Evidence from Micro Data1 1.1 Introduction . .1 1.2 Related Literature . .4 1.3 Data . .6 1.4 How Youth Substance Use Affects Parental Transfers? . .8 1.5 Why do parents react to children’s substance use by reducing transfers? . 18 1.6 Conclusion . 21 2. Tough Love and Intergenerational Altruism . 22 2.1 Introduction . 22 2.2 A Review of Empirical Evidence . 27 2.3 A Consumption Good Economy . 31 2.4 How Important is Tough Love? . 40 2.5 Are Parents Loving in the Tough Love Altruism Model? . 45 2.6 Tough Love Altruism Model with Leisure . 49 2.7 Conclusion . 53 viii 3. Cross-Cohort Differences in Joint Retirement: Evidence from the Health and Retire- ment Study . 57 3.1 Introduction . 57 3.2 Joint Retirement: Extent, Explanations and Relevance . 58 3.3 Are Recent Cohorts Less Likely to Retire Together? . 59 3.4 Data and Method . 62 3.5 Estimation Results . 72 3.6 Conclusion . 77 Bibliography . 88 Appendices: A. Appendix for Chapter 2 . 96 A.1 Redistributive Neutrality in Tough Love Altruism Model . 96 A.2 Redistributive Neutrality in Endogenous Altruism Model . 98 A.3 Simulation Results for Tough Love Altruism Model with alternative assumption about parameters . 102 B. Appendix for Chapter 3 . 105 B.1 Robustness checks for alternative sets of sample restrictions . 105 ix List of Tables Table Page 1.1 Sample means in the NLSY97 (1997-2003) . .9 1.2 Probit MLE Results . 15 1.3 First Stage Estimates . 16 1.4 Second Stage Estimates .