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


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 '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 savings behaviour in Australia. We find that even after controlling for lifecycle and health characteristics, higher permanent income is positively related with higher savings rates and better saving habits. Copyright © 2008 The Economic Society of Australia.

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Article provided by The Economic Society of Australia in its journal Economic Record.

Volume (Year): 84 (2008)
Issue (Month): s1 (09)
Pages: S32-S44

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Handle: RePEc:bla:ecorec:v:84:y:2008:i:s1:p:s32-s44
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  1. Milton Friedman, 1957. "A Theory of the Consumption Function," NBER Books, National Bureau of Economic Research, Inc, number frie57-1, December.
  2. Becker, Gary S & Mulligan, Casey B, 1997. "The Endogenous Determination of Time Preference," The Quarterly Journal of Economics, MIT Press, vol. 112(3), pages 729-58, August.
  3. James P. Smith, 1999. "Healthy Bodies and Thick Wallets: The Dual Relation between Health and Economic Status," Journal of Economic Perspectives, American Economic Association, vol. 13(2), pages 145-166, Spring.
  4. Barrett, Garry F & Crossley, Thomas F & Worswick, Christopher, 2000. "Consumption and Income Inequality in Australia," The Economic Record, The Economic Society of Australia, vol. 76(233), pages 116-38, June.
  5. Bruce Headey & Mark Wooden & Gary Marks, 2004. "The Structure and Distribution of Household Wealth in Australia," Melbourne Institute Working Paper Series wp2004n12, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
  6. Marco Cagetti & Mariacristina De Nardi, 2005. "Wealth inequality: data and models," Working Paper Series WP-05-10, Federal Reserve Bank of Chicago.
  7. Karen E. Dynan & Jonathan Skinner & Stephen Zeldes, 2000. "Do the rich save more?," Finance and Economics Discussion Series 2000-52, Board of Governors of the Federal Reserve System (U.S.).
  8. Edward N. Wolff, 1998. "Recent Trends in the Size Distribution of Household Wealth," Journal of Economic Perspectives, American Economic Association, vol. 12(3), pages 131-150, Summer.
  9. Lawrance, Emily C, 1991. "Poverty and the Rate of Time Preference: Evidence from Panel Data," Journal of Political Economy, University of Chicago Press, vol. 99(1), pages 54-77, February.
  10. 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.
  11. Yoram Ben-Porath, 1967. "The Production of Human Capital and the Life Cycle of Earnings," Journal of Political Economy, University of Chicago Press, vol. 75, pages 352.
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