Why Do the Rich Save More? A Theory and Australian Evidence

Debajyoti Chakrabarty, Hajime Katayama and Hanna Maslen

The Economic Record, 2008, vol. 84, issue s1, S32-S44

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.

Date: 2008
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https://doi.org/10.1111/j.1475-4932.2008.00481.x

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