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Why Do Some Households Save So Little? A Rational Explanation

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  • Siu Fai Leung

    (Hong Kong University of Science and Technology - Department of Economics)

Abstract

This paper offers an explanation for the puzzle of low wealth holdings among a significant fraction of the elderly. Instead of invoking irrational, non-rational, or non-optimal behavior to resolve the puzzle, it is shown that widespread low wealth holdings are consistent with a rational life-cycle model of saving with uncertain lifetime and borrowing constraint. When there is uncertainty about the length of life, it is optimal for some individuals to save little and exhaust their wealth early. The characteristics of these individuals are derived. The simulation results support that the model can account for low wealth holdings as well as early terminal wealth depletion. The analysis also rejects the common perception that uncertain lifetime reduces dissaving. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1006/redy.1999.0090
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Bibliographic Info

Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 3 (2000)
Issue (Month): 4 (October)
Pages: 771-800

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Handle: RePEc:red:issued:v:3:y:2000:i:4:p:771-800

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Related research

Keywords: life-cycke; uncertain lifetime; saving; wealth; dissaving; elderly; retirement; rational behavior;

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References

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  1. Feldstein, Martin, 1995. "College Scholarship Rules and Private Saving," American Economic Review, American Economic Association, vol. 85(3), pages 552-66, June.
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Citations

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Cited by:
  1. Sergi Jiménez-Mart�n & Alfonso R. Sánchez Mart�n, 2007. "An evaluation of the life cycle effects of minimum pensions on retirement behavior," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(5), pages 923-950.
  2. Leung, Siu Fai, 2007. "The existence, uniqueness, and optimality of the terminal wealth depletion time in life-cycle models of saving under uncertain lifetime and borrowing constraint," Journal of Economic Theory, Elsevier, vol. 134(1), pages 470-493, May.
  3. Sánchez Martín, Alfonso R., 2010. "Endogenous retirement and public pension system reform in Spain," Economic Modelling, Elsevier, vol. 27(1), pages 336-349, January.
  4. Grier, Kevin & Sutter, Daniel, 2007. "External influences on economic reform: Reform as a regional public good," European Journal of Political Economy, Elsevier, vol. 23(3), pages 660-673, September.
  5. Alvaro Forteza & Graciela Sanromán, 2011. "Estimación de un modelo estructural para las decisiones de retiro en Uruguay," Documentos de Trabajo (working papers) 2411, Department of Economics - dECON.
  6. Leung, Siu Fai, 2001. "The life-cycle model of saving with uncertain lifetime and borrowing constraint;: characterization and sensitivity analysis," Mathematical Social Sciences, Elsevier, vol. 42(2), pages 179-201, September.

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