Why do the rich save more? A theory and Australian evidence

Debajyoti Chakrabarty, Hajime Katayama, Hanna Maslen

Research output: Contribution to journalArticle

Abstract

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.

Original languageEnglish
Pages (from-to)S32–S44
Number of pages13
JournalEconomic Record
Volume84
Issue numberSUPPL.1
DOIs
Publication statusPublished - 12 Sep 2008
Externally publishedYes

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