"Life Cycle" Hypothesis of Saving: Aggregate ... - Arabictrader.com

118 The Life-Cycle Hypothesis
private insurance against various events and of life annuities. While precaution
and liquidity constraints make for higher saving, there may be another factor
making for smaller saving, namely myopia or the failure to make adequate preparations
for retirement. But there is so far little evidence of myopia being a widespread
phenomenon.
Finally, the saving rate will be affected by socio-demographic variables. To
begin with, population growth is expected to affect the saving rate through the
age structure of the population. But in addition, several other variables have been
suggested, e.g., life expectancy, the proportion of retired people, retirement habits
(the extent to which people retire and the prevailing age at which they to), and
the incidence of female participation in the labor force.
Of all these variables in our empirical test we will limit ourselves to two: first,
the proportion of the population below working age (which we take to be 15);
we expect this variable to have a negative effect on s, because of the extra load
imposed on parents through a larger family size. Second, female participation,
which we measure as the ratio of working women age 25–54 to the total number
of women in the same age group. This variable is expected to have a negative
sign, on the grounds that when a second spouse enters employment, expenditures
will rise proportionately more than income because of the need to replace, for a
price, some of the activities that the working spouse can no longer perform.
Recently, Guiso and Jappelli [8] have stressed a second reason, namely that, when
both spouses work, there is less need to accumulate a precautionary balance. The
other variables will be omitted because they are more questionable or are not
readily measurable, like retirement habits.
1.4 The General Model
1.4.1 The Role of Bequests
We can now move to the second approximation, or general model, by allowing
first for the presence of bequests. One must distinguish between bequests resulting
from the precautionary motive and those resulting from a true bequest motive.
The former arise because of uncertainty as to the time of death. Since such
bequests may be expected to be proportional to life resources, they may be
lumped with life cycle saving and will not affect the properties of the basic model
though they imply a somewhat larger wealth-to-income ratio. As for inheritances
resulting from a true bequest motive, they can also be incorporated in the model
without affecting its basic properties by postulating that bequest behavior is such
that the flow of true inheritances is proportional to the flow of life cycle saving,
or equivalently, the stock of inherited wealth at any point in time is proportional
to total wealth; this of course implies that for any given growth trend, inherited
wealth is also proportional to income. The evidence appears consistent with this