In this paper, I investigate the validity of the Modigliani‐Brumberg (M‐B) model as an explanation of the variation of wealth holdings among households. The model as such, even with the inclusion of estimates of household lifetime earnings, explains only a minute portion of the variation in household wealth. Indeed, for certain groups such as non‐white, rural residents, and the low educated, the coefficients of the regression model are insignificant. Moreover, when the top wealth holders are removed from the sample and when non‐cash financial and business assets are eliminated from the household portfolios, the explanatory power of the M‐B model increases markedly. Essentially, the validity of life‐cycle wealth accumulation models must be restricted to the white, urban, educated middle classes and their accumulation of housing, durables, and cash. The rich have very different motives for saving and very different sources of saving, while the poor do not earn sufficient income over their lifetime to accumulate any non‐negligible wealth.
|Original language||English (US)|
|Number of pages||22|
|Journal||Review of Income and Wealth|
|State||Published - Mar 1981|
ASJC Scopus subject areas
- Economics and Econometrics