THE WEALTH EFFECTS OF INCOME INSURANCE

Edward J. Bird and Paul Hagstrom

Review of Income and Wealth, 1999, vol. 45, issue 3, 339-352

Abstract: Precautionary savings models suggest that wealth should rise with income risk. Risk is reduced by means‐tested transfers, however, which implies that transfer programs should discourage private wealth accumulation. We offer a comprehensive empirical assessment based on variation across states in the generosity of a number of programs, specifically unemployment insurance and means‐tested transfers (Aid to Families with Dependent Children and Food Stamps). We use monthly data on married couples from the Survey of Income and Program Participation (SIPP) to regress wealth on income, income risk, and various measures of transfer generosity. The results support the precaution‐ary savings model and reveal moderate negative wealth effects of both unemployment insurance and means‐tested transfers, with an elasticity of about −0.18.

Date: 1999
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