The Economics of Household Saving

July 24, 2010
Erik Hurst and James Poterba, Organizers

Dean Karlan, Yale University and NBER; Margaret McConnell, Harvard School of Public Health; Sendhil Mullainathan, Harvard University and NBER; and Jonathan Zinman, Dartmouth College
Getting to the Top of Mind: How Reminders Increase Saving

Karlan and his co-authors develop and test a simple model of limited attention in intertemporal choice. The model posits that individuals fully attend to consumption in all periods but that they fail to attend to some future lumpy expenditure opportunities. This asymmetry generates some predictions that overlap with those from models of present-bias. The model here also generates the unique predictions that reminders may increase saving, and that reminders will be more effective when they increase the salience of a specific expenditure. The authors find support for these predictions in three field experiments that randomly assign reminders to new savings account holders.

Executive Summary

Mark Aguiar and Mark Bils, University of Rochester and NBER
Has Consumption Inequality Mirrored Income Inequality?

Aguiar and Bils revisit the extent to which the increase in income inequality over the last 30 years has been mirrored by consumption inequality. They do this by constructing two alternative measures of consumption expenditure using data from the Consumer Expenditure Survey (CE). First they use reports of active savings and aftertax income to construct the measure of consumption implied by the budget constraint. They find that the consumption inequality implied by savings behavior closely tracks income inequality between 1980 and 2007. Second, they use a demand system to correct for systematic measurement error in the CE's expenditure data. Specifically, they consider trends in the relative expenditure of high-income and low-income households for different goods with different income elasticities. Their estimation exploits the difference in the growth rate of luxury consumption inequality versus necessity consumption inequality. This "double-differencing," which they implement in a a regression framework, corrects for mismeasurement that can systematically vary over time by good and income group. This second exercise also indicates that consumption inequality has closely tracked income inequality over the period 1980-2007. Both of these measures show a significantly greater increase in consumption inequality than what is obtained from the CE's total household expenditure data directly.

Executive Summary

Garry Barrett, University of Sydney; Thomas Crossley, University of Cambridge and Institute for Fiscal Studies, London; and Kevin Milligan, University of British Columbia and NBER
An International Comparison of Household Saving Rates from Household Survey Data and National Accounts

Hypotheses about movements in aggregate savings rates often can be tested using micro data from surveys. However, levels and trends of aggregate and household savings measures often differ. Barrett, Crossley, and Milligan document the time paths of micro and macro savings in the U.K., Canada, and Australia, and compare them with better known U.S. statistics. They then investigate several reasons for the differences, including survey design, survey response rates, and several measurement issues. The evidence suggests that methodological choices may underlie some of the international differences in the accord between micro and macro savings rates.

Executive Summary

John Sabelhaus, University of Maryland; and Jae Song, Social Security Administration
The Great Moderation in Micro Labor Earnings

Sabelhaus and Song note that between 1980 and the early 1990s the variability of growth rates of labor earnings across the prime-age working population fell significantly. This decline and timing are consistent with other macro and micro observations about growth variability that are collectively referred to as the "Great Moderation." The variability of earnings growth is negatively correlated with age at any point in time, and the U.S. working age population got older during this period because the Baby Boom was aging. However, the decrease in variability was roughly uniform across all age groups, so population aging is not the source of the overall decline. The variance of log changes also declined at multi-year frequencies in such a way as to suggest that both permanent and transitory components of earnings shocks became more moderate. A simple identification strategy for separating age and cohort effects shows a very intuitive pattern of permanent and transitory shocks over the life cycle, and confirms that a shift over time in the stochastic process occurred even after controlling for age effects.

Executive Summary

Robert Townsend, MIT and NBER
Saving and Risk in Developing Countries: Theory and Evidence

Townsend describes the underlying economic environment of Thailand, a typical emerging market country, and tests for the efficiency of financial markets and institutions using benchmarks derived from economic theory. The Townsend-Thai data cover various regions of the country, both urban and rural, and span over 12 years including annual and monthly. Townsend finds that poor households without kinships groups in their village are quite vulnerable in their consumption and investment to fluctuations in idiosyncratic income. Local risk sharing is quite good for those in family networks, but overall risk sharing seems to fall off with geographic distance. Moreover, even locally, the Thai financial system does not allow for sufficient intermediation of savings to borrowers with productive technologies. The best fitting financial regime is a limited one, with borrowing/lending or buffer stock savings. Depending on the model, data, and stratification, moral hazard, adverse selection, and limited commitment are key parts of the financial environment.

Executive Summary

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