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Precautionary Saving and Social Insurance

  • Hubbard, R Glenn
  • Skinner, Jonathan
  • Zeldes, Stephen P

This paper argues that a life cycle model can replicate observed patterns in household wealth accumulation after counting explicitly for precautionary saving and asset-based, means-tested social insurance. The authors demonstrate that social insurance programs with means tests based on assets discourage saving by households with low expected lifetime income. In addition, they evaluate the model using a dynamic programming model. Assuming common preference parameters across lifetime income groups, the authors are able to replicate the empirical pattern that low-income households are more likely than high-income households to hold virtually no wealth. Copyright 1995 by University of Chicago Press.

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Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 103 (1995)
Issue (Month): 2 (April)
Pages: 360-99

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Handle: RePEc:ucp:jpolec:v:103:y:1995:i:2:p:360-99
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  3. Blundell, Richard & Browning, Martin & Meghir, Costas, 1994. "Consumer Demand and the Life-Cycle Allocation of Household Expenditures," Review of Economic Studies, Wiley Blackwell, vol. 61(1), pages 57-80, January.
  4. Stephen A. O'Connell & Stephen P. Zeldes, 1993. "Dynamic Efficiency in the Gifts Economy," NBER Working Papers 4318, National Bureau of Economic Research, Inc.
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  12. Hubbard, R Glenn & Skinner, Jonathan & Zeldes, Stephen P, 1994. "Expanding the Life-Cycle Model: Precautionary Saving and Public Policy," American Economic Review, American Economic Association, vol. 84(2), pages 174-79, May.
  13. Abowd, John M & Card, David, 1989. "On the Covariance Structure of Earnings and Hours Changes," Econometrica, Econometric Society, vol. 57(2), pages 411-45, March.
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  17. Richard T. Curtin & Thomas Juster & James N. Morgan, 1989. "Survey Estimates of Wealth: An Assessment of Quality," NBER Chapters, in: The Measurement of Saving, Investment, and Wealth, pages 473-552 National Bureau of Economic Research, Inc.
  18. Christopher D. Carroll, 1992. "The Buffer-Stock Theory of Saving: Some Macroeconomic Evidence," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 23(2), pages 61-156.
  19. Christopher D. Carroll & Andrew A. Samwick, 1992. "The nature and magnitude of precautionary wealth," Working Paper Series / Economic Activity Section 124, Board of Governors of the Federal Reserve System (U.S.).
  20. B. Douglas Bernheim & John Karl Scholz, 1993. "Private Saving and Public Policy," NBER Chapters, in: Tax Policy and the Economy, Volume 7, pages 73-110 National Bureau of Economic Research, Inc.
  21. Skinner, Jonathan, 1985. "Variable Lifespan and the Intertemporal Elasticity of Consumption," The Review of Economics and Statistics, MIT Press, vol. 67(4), pages 616-23, November.
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  23. Levy, Frank & Murnane, Richard J, 1992. "U.S. Earnings Levels and Earnings Inequality: A Review of Recent Trends and Proposed Explanations," Journal of Economic Literature, American Economic Association, vol. 30(3), pages 1333-81, September.
  24. Avner Bar-Ilan, 1995. "On the Proportionality and Homogeneity of Consumption and Income," Canadian Journal of Economics, Canadian Economics Association, vol. 28(4b), pages 1153-60, November.
  25. Andrew B. Abel, 1985. "Capital Accumulation and Uncertain Lifetimes with Adverse Selection," NBER Working Papers 1664, National Bureau of Economic Research, Inc.
  26. Zeldes, Stephen P, 1989. "Optimal Consumption with Stochastic Income: Deviations from Certainty Equivalence," The Quarterly Journal of Economics, MIT Press, vol. 104(2), pages 275-98, May.
  27. Elizabeth T. Powers, 1995. "Does means-testing welfare discourage saving? Evidence from the National Longitudinal Survey of Women," Working Paper 9519, Federal Reserve Bank of Cleveland.
  28. Skinner, Jonathan, 1988. "Risky income, life cycle consumption, and precautionary savings," Journal of Monetary Economics, Elsevier, vol. 22(2), pages 237-255, September.
  29. Miles S. Kimball, 1990. "Precautionary Saving and the Marginal Propensity to Consume," NBER Working Papers 3403, National Bureau of Economic Research, Inc.
  30. Kimball, Miles S, 1990. "Precautionary Saving in the Small and in the Large," Econometrica, Econometric Society, vol. 58(1), pages 53-73, January.
  31. R. Glenn Hubbard & Kenneth L. Judd, 1985. "Social Security and Individual Welfare: Precautionary Saving, LiquidityConstraints, and the Payroll Tax," NBER Working Papers 1736, National Bureau of Economic Research, Inc.
  32. Martin Feldstein, 1986. "The Effects of Fiscal Policies When Incomes are Uncertain: A Contradiction to Ricardian Equivalence," NBER Working Papers 2062, National Bureau of Economic Research, Inc.
  33. R. Glenn Hubbard & Jonathan Skinner & Stephen P. Zeldes, 1993. "The Importance of Precautionary Motives in Explaining Individual and Aggregate Saving," NBER Working Papers 4516, National Bureau of Economic Research, Inc.
  34. Moffitt, Robert, 1989. "Estimating the Value of an In-Kind Transfer: The Case of Food Stamps," Econometrica, Econometric Society, vol. 57(2), pages 385-409, March.
  35. Karen E. Dynan, 1993. "The rate of time preference and shocks to wealth: evidence from panel data," Working Paper Series / Economic Activity Section 134, Board of Governors of the Federal Reserve System (U.S.).
  36. André MASSON, 1988. "Permanent Income, Age and the Distribution of Wealth," Annales d'Economie et de Statistique, ENSAE, issue 9, pages 227-256.
  37. MaCurdy, Thomas E., 1982. "The use of time series processes to model the error structure of earnings in a longitudinal data analysis," Journal of Econometrics, Elsevier, vol. 18(1), pages 83-114, January.
  38. 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.
  39. Caballero, Ricardo J, 1991. "Earnings Uncertainty and Aggregate Wealth Accumulation," American Economic Review, American Economic Association, vol. 81(4), pages 859-71, September.
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