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Understanding Why High Income Households Save More Than Low Income Households

  • Mark Huggett

    (Economics Department, University of Illinois)

  • Gustavo Ventura

    (Department of Economics, University of Illinois)

This paper investigates why high income households save on average a higher fraction of income than do low income households in US cross-section data. The three explanations considered are (1) age differences across households, (2) temporary earnings shocks and (3) the structure of social security payments. We use a calibrated life-cycle model to evaluate the quantitative importance of these explanations. We find that age and the structure of social security payments are quantitatively important in replicating the pattern of average savings rates and income found in US cross-section data. Surprisingly, temporary shocks turn out to be of secondary importance.

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Paper provided by Centro de Investigacion Economica, ITAM in its series Working Papers with number 9701.

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Length: 40 pages
Date of creation: Jan 1997
Date of revision:
Handle: RePEc:cie:wpaper:9701
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  20. 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.
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