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Liquidity Constraints with Endogenous Income

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  • Zhao, Yucong
  • Dutkowsky, Donald H
  • Dunsky, Robert M

Abstract

This article examines liquidity constraints within the household's intertemporal model with nonseparable consumption and leisure. The model includes wage income in the minimum wealth constraint. We derive an estimable equation for employed households that holds whether or not the family is credit constrained. The formulation enables direct testing for liquidity constraints. Empirical findings using the Panel Study of Income Dynamics strongly support the existence of debt constraints. Credit constrained households have significantly lower levels of consumption, disposable income, saving, and wage rates, a higher average propensity to consume, and smaller labor hours for the spouse but not the head. Copyright 1999 by Oxford University Press.

Suggested Citation

  • Zhao, Yucong & Dutkowsky, Donald H & Dunsky, Robert M, 1999. "Liquidity Constraints with Endogenous Income," Economic Inquiry, Western Economic Association International, vol. 37(4), pages 692-705, October.
    • Handle: RePEc:oup:ecinqu:v:37:y:1999:i:4:p:692-705
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