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Why Do Some Households Save So Little? A Rational Explanation

Siu Leung ()

Review of Economic Dynamics, 2000, vol. 3, issue 4, 771-800

Abstract: This paper offers an explanation for the puzzle of low wealth holdings among a significant fraction of the elderly. Instead of invoking irrational, non-rational, or non-optimal behavior to resolve the puzzle, it is shown that widespread low wealth holdings are consistent with a rational life-cycle model of saving with uncertain lifetime and borrowing constraint. When there is uncertainty about the length of life, it is optimal for some individuals to save little and exhaust their wealth early. The characteristics of these individuals are derived. The simulation results support that the model can account for low wealth holdings as well as early terminal wealth depletion. The analysis also rejects the common perception that uncertain lifetime reduces dissaving. (Copyright: Elsevier)

Keywords: life-cycke; uncertain lifetime; saving; wealth; dissaving; elderly; retirement; rational behavior (search for similar items in EconPapers)
JEL-codes: D11 D91 E21 I12 J14 (search for similar items in EconPapers)
Date: 2000
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DOI: 10.1006/redy.1999.0090

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