Savings Behavior Research Paper

View sample Savings Behavior Research Paper. Browse other  research paper examples and check the list of research paper topics for more inspiration. If you need a religion research paper written according to all the academic standards, you can always turn to our experienced writers for help. This is how your paper can get an A! Feel free to contact our research paper writing service for professional assistance. We offer high-quality assignments for reasonable rates.

In any period all economic output is either consumed or saved. By consuming, individuals satisfy their current material needs. By saving, individuals accumulate wealth that serves a multitude of purposes. When invested or loaned, wealth yields a stream of income to the holder. It is a means of providing for future material needs, for example, during retirement. Wealth provides partial protection against many of life’s uncertainties, including the loss of a job or unexpected medical needs. Wealth can be passed on to future generations out of feelings of altruism, or used as a carrot to encourage desired behavior among those who hope for a bequest. Wealth provides status to the holder.

Because of the varied purposes served by saving, many behavioral models have been proposed and a variety of influencing factors have been identified. Demographic factors, including age structure, fertility, and mortality, have been found to influence saving in many studies. Additional factors that have been identified include the level of per capita income, economic growth rates, interest rates, characteristics of the financial system, fiscal policy, uncertainty, and public pension programs.

1. Saving Trends And Their Importance

In the 1960s, low saving rates in the developing world were a serious impediment to economic development. The industrialized countries had much higher rates of saving, but international capital flows from the industrialized to the developing world were insufficient to finance needed investment in infrastructure and industrial enterprise. Since that time, the developing countries have followed divergent paths. Saving rates in sub-Saharan Africa have remained low. After increasing somewhat in the 1970s, saving rates in Latin America declined during the late 1970s and early 1980s. In contrast, South Asian and especially East Asian saving rates have increased substantially and currently are well above saving rates found in the industrialized countries. The emergence of high saving rates is widely believed to bear major responsibility for Asia’s rapid economic growth up until the mid-1990s.

The industrialized countries face their own saving issue. Since the mid-1970s, they have experienced a gradual, but steady, decline in saving rates. US saving rates have reached especially low levels. Current US household saving rates are near zero. The low rates of saving raise two concerns: first, that economic growth will be unsustainable and, second, that current generations of workers will face substantially reduced standards of living when they retire.

2. General Saving Concepts

The national saving rate is the outcome of decisions by three sets of actors—governments, firms, and households—but analyses of saving rates are overwhelmingly based on household behavioral models. The reliance on household models is justified on two grounds. First, decisions by households may fully incorporate the decisions made by firms and governments. Firms are owned by households. When firms accumulate wealth, the wealth of households increases as well. Thus, from the perspective of the household, saving by firms and saving by households are close substitutes. Consequently, household behavior determines the private saving rate, the combined saving of firms and households. Government saving also affects the wealth of the household sector by affecting current and future taxes. By issuing debt governments can, in principle, increase consumption and reduce national saving at the expense of future generations. However, households may choose to compensate future generations (their children) by increasing their saving and planned bequests. If they do so, national saving is determined entirely by the household sector and is independent of government saving (Barro 1974).

Second, firms and governments may act as agents for households. Their saving on behalf of households may be influenced by the same factors that influence household behavior. The clearest example of this type of behavior is when firms or governments accumulate pension funds on behalf of their workers or citizens.

Households are motivated to save for a number of reasons, but current research emphasizes three motives: insurance, bequests, and lifecycle motives. Households may accumulate wealth to insure themselves against uncertain events, e.g., the loss of a crop or a job, the death of a spouse, or an unanticipated medical expense. Households may save in order to accumulate an estate intended for their descendents. Household saving may be motivated by lifecycle concerns, the divergence between the household’s earnings profile and its preferred consumption profile.

The importance of these and other motives in determining national saving rates is a matter of vigorous debate among economists. Proponents of the bequest motive have estimated that as much as 80 percent of US national saving is accounted for by the bequest motive (Kotlikoff 1988). Proponents of the lifecycle motive have estimated that an equally large portion of US national saving is accounted for by the lifecycle motive (Modigliani 1988). Clearly, the way in which changing demographic conditions impinge on national saving rates will depend on the importance of these different motives.

3. The Lifecycle Model

Both the larger debate on the determinants of saving and explorations of the impact on saving of demographic factors have been framed by the lifecycle model (Modigliani and Brumberg 1954). The key idea that motivates the model is the observation that for extended portions of our lives we are incapable of providing for our own material needs. Thus, economic resources must be reallocated from economically productive individuals concentrated at the working ages to dependents concentrated at young or old ages. Several mechanisms exist for achieving this reallocation. In traditional societies, the family plays a dominant role. Typically, the young, the old, and those of working age live in extended families supported by productive family members. In modern societies, solving the lifecycle problem is a shared responsibility. Although the young continue to rely primarily on the family, the elderly rely on the family, on transfers from workers effected by the government, and on personnel wealth they have accumulated during their working years (Lee 2000).

The lifecycle saving model is most clearly relevant to higher income settings where capital markets have developed, family support systems have eroded, and workers anticipate extended periods of retirement. Under these conditions, the lifecycle model implies that households consisting of young, working age adults will save, while household consisting of old, retired adults will dis-save. The national saving rate is determined, in part, by the relative size of these demographic groups. A young age structure yields high saving rates; an old age structure yields low saving rates. Likewise, a rise in the rate of population growth leads to higher saving rates because of the shift to a younger age structure.

In the standard formulation of the lifecycle model, changes in the growth rate of per capita income operate in exactly the same way as changes in the population growth rate. Given higher long-run rates of economic growth, young adults have greater lifetime earnings than older adults. They have a correspondingly greater impact on the aggregate saving rate because of their control of a larger share of economic resources. Consequently, an increase in either the population growth rate or the per capita income growth rate leads to higher saving.

The rate of growth effect is one of the most important and widely tested implications of the lifecycle saving model. With a great deal of consistency, empirical studies have found that an increase in the rate of per capita income growth leads to an increase in the national saving rate. Empirical research does not, however, support the existence of a positive population rate of growth effect (Deaton 1989).

The standard lifecycle model provides no basis for reconciling the divergent rate of growth effects. The impact of child dependency on household saving provides one possible explanation of why population growth and economic growth need not have the same effect on aggregate saving. Coale and Hoover (1958) were the first to point out the potentially important impact of child dependency. They hypothesized that ‘A family with the same total income but with a larger number of children would surely tend to consume more and save less, other things being equal’ (p. 25). This raised the possibility that saving follows an inverted-U shaped curve over the demographic transition. In low-income countries, with rapid population growth rates and young age structure, slower population growth would lead to higher saving. But in higher income countries that were further along in their demographic transitions, slower population growth would lead to a population concentrated at older, low saving ages as hypothesized in the lifecycle model. These contrasting demographic effects have been modeled in the empirical literature using the youth and old-age dependency ratios.

The variable lifecycle model incorporates the role of child dependency by allowing demographic factors to influence both the age structure of the population and the age profiles of consumption, earning, and, hence, saving. In this version of the lifecycle model the size of the rate of growth effect varies depending among other things on the number or cost of children. As with the dependency ratio model, saving follows an inverted-U shaped path over the demographic transition. However, the impact of demographic factors varies with the rate of economic growth. The model implies that in countries with rapid economic growth, e.g., East Asia, demographic factors will have a large impact on saving, but in countries with slow economic growth, e.g., Africa, demographic factors would have a more modest effect (Mason 1987).

Empirical studies of population and saving come in two forms. Most frequently, researchers have based their analyses on aggregate time series data now available for many countries. Recent estimates support the existence of large demographic effects on saving. Analysis by Kelley and Schmidt (1996) supports the variable lifecycle model. Higgins and Williamson (1997) find that demographic factors influence saving independently of the rate of economic growth. An alternative approach relies on microeconomic data to construct an age-saving profile. The impact of age structure is then assessed assuming that the age profile does not change. In the few applications undertaken, changes in age structure hAdvan impact on saving that is more modest than found in analyses of aggregate saving data. (See Deaton and Paxson (1997) for an example.) Until these approaches are reconciled, a firm consensus about the magnitude of demographic effects is unlikely to emerge.

4. Unresolved Issues

There are a number of important issues that have not been resolved and require additional work. First, the saving literature does not yet adequately incorporate the impact of changing institutional arrangements. Studies of saving in the industrialized countries and recent work on developing countries considers the impact of state-sponsored pension programs on saving, but the impact of family support systems has received far too little emphasis. The erosion of the extended family in developing countries is surely one of the factors that has contributed to the rise of saving rates observed in many developing countries.

Second, the role of mortality has received inadequate attention. The importance of lifecycle saving depends on the expected duration of retirement. In high mortality societies, few reach old age and many who do continue to work. Only late in the mortality transition, when there are substantial gains in the years lived late in life, does an important pension motive emerge.

Third, the saving models currently in use are static models and do not capture important dynamics. Recent simulation work that combines realistic demographics with lifecycle saving behavior shows that during the demographic transition countries may experience saving rates that substantially exceed equilibrium values for sustained periods of time (Lee 2000).


  1. Barro R J 1974 Are government bonds net wealth? Journal of Political Economy 6 (December): 1095–117
  2. Coale C A, Hoover E M 1958 Population Growth and Economic Development in Low-income Countries: A Case Study of India’s Prospects. Princeton University Press, Princeton, NJ
  3. Deaton A1989 Saving in developing countries: Theory and review. Proceedings of the World Bank Annual Conference on Development Economics, Supplement to the World Bank Economic Review and the World Bank Research Observer, pp. 61–96
  4. Deaton A, Paxson C 1997 The effects of economic and population growth on national saving and inequality. Demography 34(1): 97–114
  5. Higgins M, Williamson J G 1997 Age structure dynamics in Asia and dependence on foreign capital. Population and Development Review 23(2): 261–94
  6. Kelley A C, Schmidt R M 1996 Saving, dependency and development. Journal of Population Economics 9(4): 365–86
  7. Kotlikoff L J 1988 Intergenerational transfers and savings. Journal of Economic Perspectives 2(2): 41–58
  8. Lee R D 2000 Intergenerational transfers and the economic life cycle: A cross-cultural perspective. In: Mason A, Tapinos G (eds.) Sharing the Wealth: Demographic Change and Economic Transfers Between Generations. Oxford University Press, Oxford, UK
  9. Lee R D, Mason A, Miller T 2000 Life cycle saving and the demographic transition: The case of Taiwan. In: Chu C Y, Lee R D (eds.) Population and Economic Change in East Asia, Population and Development Review. 26: 194–219
  10. Mason A 1987 National saving rates and population growth: A new model and new evidence. In: Johnson D G, Lee R D (eds.) Population Growth and Economic Development: Issues and Evidence. University of Wisconsin Press, Madison, WI, pp. 5230–60
  11. Modigliani F 1988 The role of intergenerational transfers and life cycle saving in the accumulation of wealth. Journal of Economic Perspectives 2(2): 15–40
  12. Modigliani F, Brumberg R 1954 Utility analysis and the consumption function: An interpretation of cross-section data. In: Kurihara K (ed.) Post-Keynesian Economics. Rutgers University Press, New Brunswick, NJ
Scale In Geography Research Paper
Ferdinand De Saussure Research Paper


Always on-time


100% Confidentiality
Special offer! Get discount 10% for the first order. Promo code: cd1a428655