Demographic Transition and Household Finance: Optimal Consumption Growth and Asset Accumulation Under Household Fission in India

Abstract

The Indian family has changed significantly from joint to nuclear structures due to demographic shifts, urban growth, increased education, job mobility, and changing socio-economic norms. This shift affects household spending, saving habits, and long-term asset building. This study develops a utility-maximization framework to examine how households transitioning from joint families to unequal nuclear families affect welfare, spending growth, and saving outcomes. Utility is measured on a per-capita basis to enable an equitable welfare comparison in households of different sizes whereas income is randomly growing. The model specifies a utility with constant relative risk aversion (CRRA) leading to an equation which determines optimal growth in spending. The numerical simulations are implemented on a horizon of ten period and various income conditions: higher family size with lower income, higher family size with higher income and equal income among the family. The results show that it is true that smoothing consumption is valid in any situation, consistent with inter-temporal optimization, despite strong income variations. The findings indicate that individuals keep their spending consistent across all scenarios, as their expenditure habits align with their long-term financial plans that stay steady despite fluctuations in income. The family size structure determines how families perform economically according to this research. Smaller family units generally experience improved individual spending, more efficient savings, and quicker accumulation of assets than bigger families, regardless of income level. The consumption habits of both families diminish slowly over time, leading individuals to feel a reduction in their welfare as they set aside funds for emergencies. Families maintain their total utility after separation, but their different family sizes cause them to follow different saving and asset development trajectories. The research shows that nuclear family structures help households achieve their financial goals, but these changes create problems for long-term financial stability and capital generation because of demographic restrictions, which make it necessary to include family structure when creating savings and welfare dynamic models.