Note: The paper has benefited from valuable comments and suggestions by Conchita D'Ambrosio (the managing editor), the two anonymous referees, Michael Haliassos, Josef Hollmayr, Yigitcan Karabulut, Sebastian Kripfganz, and conference participants of the 10th Journees Louis-Andre Gerard-Varet Conference in Public Economics, New Directions in Welfare Congress of OECD, 32nd International Association of Review of Income and Wealth General Conference, as well as the seminar participants at the Goethe University Frankfurt. I would like to thank Ivan Fernandez-Val for sharing his Matlab codes. The views expressed herein are my own and do not necessarily reflect those of Deutsche Bank AG or Deutsche Bank Research.
Is perceived financial inadequacy persistent?
Article first published online: 22 AUG 2013
© 2013 International Association for Research in Income and Wealth
Review of Income and Wealth
Volume 60, Issue 4, pages 636–654, December 2014
How to Cite
Kaya, O. (2014), Is perceived financial inadequacy persistent?. Review of Income and Wealth, 60: 636–654. doi: 10.1111/roiw.12067
- Issue published online: 9 NOV 2014
- Article first published online: 22 AUG 2013
- dynamic probit model with fixed effects;
- financial well-being
In an attempt to understand the determinants of financial inadequacy, this paper employs the ability of households to make ends meet as a measure of their perceived financial inadequacy. Using household-level data from the European Community Household Panel covering eight countries over the period from 1994 to 2001, this study applies a dynamic probit model that incorporates both state dependency and individual fixed effects. Exploiting a latterly enhanced bias-corrected fixed-effects probit model, I address the persistent nature of subjective financial inadequacy by directly estimating fixed effects while correcting for incidental parameters and avoiding the initial conditions problem of dynamic models. The results reveal that employing time-invariant individual effects to model subjective monetary perception is essential. However, by controlling for household heterogeneity, income, indebtedness, and health status, I find that in addition to the major differences across European households, country-specific factors can have adverse effects on the persistent nature of perceived financial inadequacy.