Xu Cui ab , PhD candidate Jing Jian Xiao b , PhD, Professor Jingtao Yi a , PhD, Professor

1. Family Income in Early Life on Financial Independence of Young Adults: Evidence from a Matched Panel Data Xu Cuiab, PhD candidate Jing Jian Xiaob, PhD, Professor JingtaoYia, PhD, Professor aSchool of Business, Renmin University of China. bDepartmentof Human Development and Family Studies, University of Rhode Island.

2. Outline • 1. Background • 2. Analysis • 3. Result • 4. Discussion

3. Introduction • Financial independence is a basic requirement for living an independent life for adults. • Financial independence for young adults is especially important. • Not many studies on the financial independence of young adults: • Whittington and Peters (1996). Leaving home. 1988 PSID. • Lee and Mortimer (2009). Percentage of living expenses that came from either young adult /spouse/partner's own earnings or savings.High school sample in 1988 and following survey in 1997. • Xiao et al. (2014). Self-reported financial independence index. 2009 PSID and 2009 TA. • These studies do not consider the effect of family income during adolescence on the financial independence of young adults.

4. Study Purpose • To examine the relationship of family income during adolescence and financial independence of young adult. Adolescence(13-18) Young adult (18-27) Age time line ? Family income during adolescence Financial independence as young adult

5. Unique Contributions • First, we consider an important but underexplored factor, family income during adolescence. • Second, we used matched panel data between 1997 and 2015. • Third, we tried several ways to account for the endogeneity problem.

6. Theoretical Background • Whittington and Peters (1996) developed an economic framework to analyze a young adult’s decision to be financially independent.

7. Theoretical Background Influenceof family income during adolescence on financial independence of young adult • Intergenerational mobility theory (Becker & Tomes, 1979; Heckman & Mosso, 2014; Chetty et al., 2014) : Parent high income→Children high income → High financial independence. • The investment theory (Yeung et al., 2002): Investment: Parents’ resources. Outcome: Financial independence of children. • Financial socialization theory (Sherraden, 2010, 2013) : Parent high income→ More financial activities → Children learn more financial knowledge and skills → High financial independence.

8. Theoretical Background Some theories and evidence suggest that effects of family income on the development of children differ in different parts of income distribution (Becker & Tomes,1986; Del Boca et al., 2014;Gao et al., 2014; Løken, Mogstad& Wiswall, 2012; Noble et al., 2015; Padgett & Remle, 2016).

9. Hypothesis • The effect of family income during adolescence on the financial independence of young adults is inversely U-shaped. Adolescence (13-18) Young adult (18-27) Age time line Family income during adolescence Financial independence as young adult

10. Data • Panel Study of Income Dynamics (PSID) 1999, 2001, 2003, 2005, 2007, 2009, 2011, 2013 and 2015 • Child Development Supplement (CDS) 1997, 2002 and 2007 • Transition Adulthood Supplement (TAS) 2009, 2011, 2013 and 2015 • 2141 young adults- sample size 5162-2.4times • PSID-1968-18,000 individuals-5,000 families. • Employment, income, wealth, expenditures, health, marriage, childbearing, child development, philanthropy, education, and numerous other topics.

11. Variables • Financial independence: 1-lowest level, 5- highest level Constructed from the average of all non-missing responses to the following questions: How much responsibility do you have for earning own living? How much responsibility do you have for paying own rent? How much responsibility do you have for paying own bills? How much responsibility do you have for managing own money? 1 - “Somebody else does this for me all of the time” 5 - “I am completely responsible for this all the time” • Family income during adolescence: Average family income from 13 to 18. In logarithmic form.

12. Data Analyses • Regression method: Random Effect Ordered Logit • Six models were presented in the table. • Model I used bivariate analysis. • Model II added a square term of log family income during adolescence. • Model III added control variables from TAS. • Model IV used sample who had not graduated from college. • Model V and VI used sample who had graduated from college

13. Descriptive Statistics

14. Descriptive Statistics

15. Result of Regressions Coefficients are log odd ratio. Standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1 .

16. Result Summary • The relationship between family income during adolescence and financial independence of young adults is showing an inverted U-shape • College graduates have significantly higher likelihoods of financial independence than other young adults. • If the young adults do not graduate from college, the relationship of their family income during adolescence and their financial independence is inverted U-shaped. • Once young adults graduate from college, their financial independence will no longer be influenced by their family income during adolescence.

17. Limitations and Future Studies • First, young adults are in an unstable state. • Second, the data set is limited to one country. • Future research may address these limitations by using cross national data, and young adults in age group of 25 to 35.

18. Policy Implication • Government can probably play a role in boosting the income of the low income families who have teenaged children so that the next generation will have a better chance of being financially independent. • Governments and educators should consider developing policies to help young adults obtain their college degree on time. • Assisting young adults in improving their money management ability and problem solving ability by offering practical personal finance courses at school and guidance to parents. • Financial counselors and planners may provide pertinent suggestions such as advising middle and high income parents to teach their children before college graduation on how to better manage finances and low income parents to encourage their children to graduate from college.