The theory of precautionary saving is shown in this paper to be isomorphic to the Arrow-Pratt theory of risk aversion, making possible the application of a large body of knowledge about risk aversion to precautionary saving, and more generally, to the theory of optimal choice under risk In particular, a measure of the strength of precautionary saving motive analogous to the Arrow-Pratt measure of risk aversion is used to establish a number of new propositions about precautionary saving, and to give a new interpretation of the Oreze-Modigliani substitution effect

Precautionary Saving in the Small and in the Large

This paper constructs a model of saving for retired single people that includes heterogeneity in medical expenses and life expectancies, and bequest motives We estimate the model using Assets and Health Dynamics of the Oldest Old data and the method of simulated moments Out‐of‐pocket medical expenses rise quickly with age and permanent income The risk of living long and requiring expensive medical care is a key driver of saving for many higher‐income elderly Social insurance programs such as Medicaid rationalize the low asset holdings of the poorest but also benefit the rich by insuring them against high medical expenses at the ends of their lives

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Why do the Elderly Save? The Role of Medical Expenses

This paper constructs a model of saving for retired single people that includes heterogeneity in medical expenses and life expectancies, and bequest motives. We estimate the model using AHEAD data and the method of simulated moments. Out-of-pocket medical expenses rise quickly with age and permanent income. The risk of living long and requiring expensive medical care is a key driver of saving for many higher income elderly. Social insurance programs such as Medicaid rationalize the low asset holdings of the poorest, but also benefit the rich, by insuring them against high medical expenses at the ends of their lives.

/pdf/why-do-the-elderly-save-the-role-of-medical-expenses-ep1qzgfqkv.pdf

Why Do the Elderly Save? The Role of Medical Expenses

This paper presents new empirical evidence in support of the view that a significant fraction of total saving is motivated solely by the desire to leave bequests. Specifically, I find that Social Security annuity benefits significantly raise life insurance holdings and depress private annuity holdings among elderly individuals. These patterns indicate that the typical household would choose to maintain a positive fraction of its resources in bequeathable forms, even if insurance markets were perfect. Evidence on the relationship between insurance purchases and total resources reinforces this conclusion.

How Strong are Bequest Motives? Evidence Based on Estimates of the Demand for Life Insurance and Annuities

This paper uses Consumer Expenditure Survey data and a seminonparametric statistical model to estimate life cycle profiles of consumption, controlling for demographics, cohort, and time effects. We construct age profiles for total and nondurable consumption as well as expenditure patterns for consumer durables. Special emphasis is placed on the comparison of different approaches to control for changes in demo- graphics over the life cycle. We find significant humps over the life cycle for total, nondurable, and durable expenditures. Changes in household size account for roughly half of these humps. Bootstrap simulations suggest that our empirical estimates are tight in that standard errors are small.

/pdf/consumption-over-the-life-cycle-facts-from-consumer-4dzw0m75p1.pdf

Consumption over the Life Cycle: Facts from Consumer Expenditure Survey Data

This paper investigates the impact of demographic shocks on optimal decisions about saving, life insurance, and, most centrally, asset allocation. We analyze these choices within the framework of a life-cycle model that features exogenous changes in family composition, heterogeneity in lifetime income, and uninsurable fluctuations in earnings and medical costs. Our analysis indicates that marital-status transitions and children can have important effects on optimal household decisions. Widowhood induces sharp reductions in the portfolio shares in stock, and the impact is largest for women and individuals with children. Divorce causes men and women to reallocate their portfolios in different directions; men choose much riskier allocations, while women opt for safer ones. Children play a fundamental role in the optimal portfolio decisions. Men with children, for example, increase their shares in response to divorce by less than half as much as men without children. Comparing our simulation results with panel-data evidence on stockholding from the PSID and the HRS, we conclude that changes in marital status and children matter empirically as well, but not always in the ways that the model predicts.

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The Effect of Marital Status and Children on Savings and Portfolio Choice

/pdf/the-effects-of-marital-status-and-children-on-savings-and-45thqvdivu.pdf

The Effects of Marital Status and Children on Savings and Portfolio Choice

https://www.federalreserve.gov/pubs/feds/2008/200813/200813pap.pdf

The Trajectory of Wealth in Retirement

Previous studies find a strong and positive empirical connection between health status and the share of risky assets held in household portfolios. But is this relationship truly causal, in the sense that households respond to changes in health by altering their portfolio allocation, or does it simply reflect unobserved differences across households? We find that the link between health and risky assets depends crucially on the econometric treatment of unobserved heterogeneity. Once we account adequately for unobserved household differences, we find no statistically significant effect of health status on either portfolio allocations or ownership among older households (those with respondents 70 and older) in the Health and Retirement Study. Younger households, in contrast, do seem to adjust their portfolios on both the extensive and intensive margins in response to health shocks.

Does health affect portfolio choice

A number of recent studies find that poor health is empirically associated with a safer portfolio allocation. It is difficult to say, however, whether this relationship is truly causal. Both health status and portfolio choice are influenced by unobserved characteristics such as risk attitudes, impatience, information, and motivation, and these unobserved factors, if not adequately controlled for, can induce significant bias in the estimates of asset demand equations. Using the 1992–2006 waves of the Health and Retirement Study, we investigate how much of the connection between health and portfolio choice is causal and how much is due to the effects of unobserved heterogeneity. Accounting for unobserved heterogeneity with fixed effects and correlated random effects models, we find that health does not appear to significantly affect portfolio choice among single households. For married households, we find a small effect (about 2–3 percentage points) from being in the lowest of five self-reported health categories. Copyright © 2009 John Wiley & Sons, Ltd.

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David A. Love

Papers

The Effect of Marital Status and Children on Savings and Portfolio Choice

The Effects of Marital Status and Children on Savings and Portfolio Choice

The Trajectory of Wealth in Retirement

Does health affect portfolio choice

Does health affect portfolio choice