DETERMINANTS OF ASSET BUILDING SONDRA BEVERLY MICHAEL SHERRADEN MIN ZHAN TRINA R. WILLIAMS SHANKS YUNJU NAM REID CRAMER MARCH 2008 The Urban Center for Social The New Institute Development America Foundation Determinants of Asset Building A Report in the Series Poor Finances: Assets and Low-Income Households Sondra Beverly Michael Sherraden Min Zhan Trina R. Williams Shanks Yunju Nam Center for Social Development Washington University in St. Louis and Reid Cramer New America Foundation March 2008 This report was prepared for and funded by the U.S. Department of Health and Human Services, Office of the Assistant Secretary for Planning and Evaluation (DHHS/ASPE) under Order Number GS23F8198H / HHSP233200400131U to the Urban Institute and its collaborators at the Center for Social Development (CSD) at Washington University in St. Louis, and the New America Foundation. This report was prepared between September 2004 and March 2006. John Tambornino, Jeremías Alvarez, and Linda Mellgren at DHHS were project officers, Signe-Mary McKernan of the Urban Institute was overall project director, and Michael Sherraden directed the work at CSD. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders. Acknowledgments The report has benefited from comments of the entire project teams at the Urban Institute and the Center for Social Development, as well as helpful comments from Jeremías Alvarez, Alana Landey, Gretchen Lehman, and Linda Mellgren of ASPE, from Elizabeth Lower-Basch and Michael Wiseman formerly of ASPE, and from John Tambornino and Leonard Sternbach of the Administration for Children and Families/DHHS. The authors, most of whom are affiliated with the Center for Social Development (CSD), are grateful to the university for indirect support that makes this work possible. This work is informed by a large body of previous work at CSD, involving many staff members on saving- related research projects. Although this work cites these reports and publications, it does not adequately convey the authors’ gratitude toward all who contributed to the thinking and empirical work that underlie this report. CSD’s research on saving has been funded by many organizations. For applied research contributing to this report, special acknowledgement is owed to the Ford Foundation, Charles Stewart Mott Foundation, Annie E. Casey Foundation, F.B. Heron Foundation, Ewing Marion Kauffman Foundation, and MetLife Foundation. The authors’ primary affiliations are as follows: Beverly, School of Social Welfare at the University of Kansas; Sherraden, George Warren Brown School of Social Work at Washington University in St. Louis; Cramer, New America Foundation; Zhan, School of Social Work at the University of Illinois, Urbana-Champaign; and Shanks, School of Social Work at the University of Michigan. Mark Schreiner contributed to this report in multiple ways. Jennifer Adhima, Eunhee Han, Jung Hee Han, Jennifer Kim, and Lin Zhang provided valuable research assistance. CONTENTS Introduction to the Series ............................................................................................................. iv Why Assets Are Important...................................................................................................... v Income and Assets in Public Policy........................................................................................ v Asset Policy for Low-Income Households ............................................................................ vi Executive Summary ................................................................................................................. ES-1 Theories of the Determinants of Saving and Asset Accumulation ................................. ES-1 Conceptual Framework for the Determinants of Asset Building................................... ES-2 Empirical Evidence on Determinants of Asset Building ................................................. ES-3 Effects of Individual Constructs on Saving and Investment Action................................. ES-3 Effects of Institutional Constructs on Saving and Investment Action.............................. ES-4 Suggestions for Future Research ...................................................................................... ES-4 Conclusions.......................................................................................................................... ES-6 I. Introduction ................................................................................................................................1 II. Theories of the determinants of Asset Building ...................................................................... 2 A. Neoclassical Economic Theory............................................................................................ 2 B. Psychological and Sociological Theory............................................................................... 4 C. Behavioral Economic Theory.............................................................................................. 6 D. Strengths and Weaknesses of the Existing Theoretical Work ......................................... 7 III. Conceptual Framework for the Determinants of Asset Building.......................................... 9 A. Introduction.......................................................................................................................... 9 B. Effects of Saving and Investment Action on Asset Accumulation................................. 11 C. Effects of Individual Constructs on Saving and Investment Action ............................. 13 Economic Resources and Needs ........................................................................................... 13 Informal Social Support........................................................................................................ 16 Financial Literacy ................................................................................................................. 16 Psychological Variables........................................................................................................ 17 D. Effects of Institutional Constructs on Saving and Investment Action .......................... 19 Access ................................................................................................................................... 19 Information ........................................................................................................................... 19 Incentives .............................................................................................................................. 20 Facilitation ............................................................................................................................ 21 Expectations.......................................................................................................................... 22 Restrictions ........................................................................................................................... 22 Security ................................................................................................................................. 23 i E. Effects of Intergenerational and Interhousehold Transfers on Investment Action and Asset Accumulation ................................................................................................................ 24 F. How Public Policy Shapes Saving- and Asset-Related Institutional Constructs .......... 24 Bundles of Institutional Constructs....................................................................................... 25 Institutional Supports Provided through Targeted Asset-Building Initiatives...................... 33 IV. Empirical Evidence on The Determinants of Asset Building .............................................. 40 A. Data Sources Used in the Literature ................................................................................ 40 Strengths and Limitations of Data Sources........................................................................... 40 B. Methods Used in the Literature ........................................................................................ 41 Strengths and Limitations of Methods.................................................................................. 41 C. Findings from the Literature ............................................................................................ 43 Effects of Saving and Investment Action on Asset Accumulation....................................... 43 Effects of Individual Constructs on Saving and Investment Action..................................... 44 Effects of Institutional Constructs on Saving and Investment Action.................................. 49 Effects of Intergenerational and Interhousehold Transfers on Investment Action and Asset Accumulation........................................................................................................................ 62 D. Suggestions for Future Research...................................................................................... 63 V. Conclusions ............................................................................................................................. 65 References .................................................................................................................................... 68 ii EXHIBITS Exhibit ES-1. Determinants of Saving and Investment Action and