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Why Do the Rich Save More? A Theory and Australian Evidence *
Author(s) -
CHAKRABARTY DEBAJYOTI,
KATAYAMA HAJIME,
MASLEN HANNA
Publication year - 2008
Publication title -
economic record
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.365
H-Index - 42
eISSN - 1475-4932
pISSN - 0013-0249
DOI - 10.1111/j.1475-4932.2008.00481.x
Subject(s) - economics , permanent income hypothesis , production (economics) , inequality , distribution (mathematics) , economic inequality , capital (architecture) , income distribution , labour economics , demographic economics , microeconomics , monetary economics , life cycle hypothesis , macroeconomics , history , mathematical analysis , mathematics , archaeology
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.