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Why Do Some Households Save So Little? A Rational Explanation

  • Siu Fai Leung

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

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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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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  1. Orazio P. Attanasio & Hilary Williamson Hoynes, 2000. "Differential Mortality and Wealth Accumulation," Journal of Human Resources, University of Wisconsin Press, vol. 35(1), pages 1-29.
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  13. Martin Feldstein, 1992. "College Scholarship Rules and Private Saving," NBER Working Papers 4032, National Bureau of Economic Research, Inc.
  14. Siu Fai Leung, 1995. "A distinction between continuous-time and discrete-time models of uncertain lifetime," Economics Letters, Elsevier, vol. 47(3-4), pages 291-296, March.
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  17. Hurd, Michael D, 1989. "Mortality Risk and Bequests," Econometrica, Econometric Society, vol. 57(4), pages 779-813, July.
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  19. Nancy Jianakoplos & Paul Menchik & Owen Irvine, 1989. "Using Panel Data to Assess the Bias in Cross-sectional Inferences of Life-Cycle Changes in the Level and Composition of Household Wealth," NBER Chapters, in: The Measurement of Saving, Investment, and Wealth, pages 553-644 National Bureau of Economic Research, Inc.
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  22. Mervyn A. King & Louis Dicks-Mireaux, 1981. "Asset Holdings and the Life Cycle," NBER Working Papers 0614, National Bureau of Economic Research, Inc.
  23. Poterba, James M & Venti, Steven F & Wise, David A, 1994. "Targeted Retirement Saving and the Net Worth of Elderly Americans," American Economic Review, American Economic Association, vol. 84(2), pages 180-85, May.
  24. Mirer, Thad W, 1994. "The Dissaving of Annuity Wealth and Marketable Wealth in Retirement," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 40(1), pages 87-97, March.
  25. King, M A & Dicks-Mireaux, L-D L, 1982. "Asset Holdings and the Life-Cycle," Economic Journal, Royal Economic Society, vol. 92(366), pages 247-67, June.
  26. B. Douglas Bernheim, 1992. "How Strong are Bequest Motives? Evidence Based on Estimates of the Demand for Life Insurance and Annuities," NBER Working Papers 2942, National Bureau of Economic Research, Inc.
  27. Louise Sheiner & David N. Weil, 1992. "The Housing Wealth of the Aged," NBER Working Papers 4115, National Bureau of Economic Research, Inc.
  28. Hurd, Michael D, 1987. "Savings of the Elderly and Desired Bequests," American Economic Review, American Economic Association, vol. 77(3), pages 298-312, June.
  29. Alan L. Gustman & F. Thomas Juster, 1995. "Income and Wealth of Older American Households: Modeling Issues for Public Policy Analysis," NBER Working Papers 4996, National Bureau of Economic Research, Inc.
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