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Why do the Rich Save More? A Theory and Australian Evidence

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  • Chakrabarty, Debajyoti
  • Katayama, Hajime
  • Maslen, Hanna

Abstract

We provide a theory to explain the existence of inequality in an economy where agents have identical preferences and have access to the same production technology. Agents consume a "utility" good and a "health" good which determines their subjective discount factor. Depending on initial distribution of capital the economy gets separated into different permanent-income groups. This leads to a testable hypothesis: "The rich save a larger proportion of their permanent income". We test this implication for the savings behaviour in Australia. We show that even after controlling for life-cycle characteristics permanent income and savings are positively correlated. An improvement in the health leads to a positive effect on savings behaviour.

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File URL: http://hdl.handle.net/2123/7656
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Bibliographic Info

Paper provided by University of Sydney, School of Economics in its series Working Papers with number 06-02.1.

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Date of creation: Mar 2006
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Handle: RePEc:syd:wpaper:2123/7656

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Postal: Sydney, NSW 2006
Phone: 61 +2 9351 5055
Fax: 61 +2 9351 4341
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Web page: http://sydney.edu.au/arts/economics
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Related research

Keywords: Saving; Inter-temporal Choice; Health; Income Distribution;

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References

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  1. Marco Cagetti & Mariacristina De Nardi, 2006. "Wealth Inequality: Data and Models," NBER Working Papers 12550, National Bureau of Economic Research, Inc.
  2. James P. Smith, 1999. "Healthy Bodies and Thick Wallets: The Dual Relation between Health and Economic Status," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 13(2), pages 145-166, Spring.
  3. Yoram Ben-Porath, 1967. "The Production of Human Capital and the Life Cycle of Earnings," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 75, pages 352.
  4. Karen E. Dynan & Jonathan Skinner & Stephen P. Zeldes, 2000. "Do the rich save more?," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2000-52, Board of Governors of the Federal Reserve System (U.S.).
  5. Milton Friedman, 1957. "A Theory of the Consumption Function," NBER Books, National Bureau of Economic Research, Inc, number frie57-1, October.
  6. Garry Barrett & Thomas Crossley & Christopher Worswick, 1999. "Consumption and Income Inequality in Australia," CEPR Discussion Papers 404, Centre for Economic Policy Research, Research School of Economics, Australian National University.
  7. Milton Friedman, 1957. "Introduction to "A Theory of the Consumption Function"," NBER Chapters, in: A Theory of the Consumption Function, pages 1-6 National Bureau of Economic Research, Inc.
  8. Bruce Headey & Gary Marks & Mark Wooden, 2005. "The Structure and Distribution of Household Wealth in Australia," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 38(2), pages 159-175, 06.
  9. Edward N. Wolff, 1998. "Recent Trends in the Size Distribution of Household Wealth," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 12(3), pages 131-150, Summer.
  10. Becker, Gary S & Mulligan, Casey B, 1997. "The Endogenous Determination of Time Preference," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 112(3), pages 729-58, August.
  11. Lawrance, Emily C, 1991. "Poverty and the Rate of Time Preference: Evidence from Panel Data," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 99(1), pages 54-77, February.
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Cited by:
  1. Dutta, Dilip & Yang, Yibai, 2013. "Endogenous time preference: evidence from Australian households' behaviour," Working Papers, University of Sydney, School of Economics 2013-13, University of Sydney, School of Economics.

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