Date of Graduation

2007

Document Type

Dissertation/Thesis

Abstract

This dissertation uses the survey data from the Survey of Consumer Finances (SCF) and the Survey of Income and Program Participation (SIPP) to test the Life Cycle Permanent Income Hypothesis (LCPI) as it applies to the consumption of durable goods. To measure durable consumption services (“durable consumption,” for short) housing and vehicle consumption data are employed. We find that households mostly behave as implied by the LCPI Hypothesis, although they consume from their permanent income somewhat less than what the strict LCPI Hypothesis predicts. We also incorporate the effect of household financial constraints, which have previously been shown to have a direct and strong effect on consumption patterns, in our test for the extended version of the LCPI hypothesis from the SCF and SIPP data. From the SCF data, financially unconstrained households that have never been rejected in applying for credit from financial institutions, have never carried credit card balances, and have no leased vehicle are selected to be examined. These unconstrained households still consume less than the LCPI model predicts. As was the result in the regressions with SCF data, financially unconstrained households from the SIPP data, which are chosen as households that do not have store or credit card balances and do not owe money for their previous vehicle purchases, consume less of durable service consumption than suggested by the LCPI model. Together with the consideration for liquidity constraints, precautionary effects resulting from households’ income uncertainty and household prudence, which are proxied by choices of mortgage interest rates, decisions on holding health insurance and life insurance, on owning a business, and on preference over types of financial portfolio investments, plays a significant role in the households’ level of durable service consumption. However, households which are liquidity unconstrained and are less prudent by our definition consume similarly to the general households. These households continue to consume durable consumption services somewhat less than what the LCPI hypothesis suggests. In addition, we investigate the effects of sex and race on durable consumption. There are no significant consumption differences by sex. However, Black households slightly but significantly consume less housing services but more vehicle services. These studies based on two different datasets, the SCF and the SIPP, lead to the similar conclusion that households, no matter if they are liquidity unconstrained and if they are less prudent, consume less durable services than the LCPI hypothesis predicts. From these results, the permanent income elasticities of housing and vehicle consumption demands are less than one; therefore, we may conclude that housing and vehicle consumption services are necessities in the U.S. economy.

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