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

30 The Life-Cycle Hypothesis
is one for which scattered supporting empirical information is available. 53 Furthermore,
as we have seen, our hypothetical household goes on consuming a constant
fraction of income (equation II.9) even though its assets continue to rise,
and reach their peak just before retirement; the rise in assets relative to income
does not depress saving because it is part and parcel of the life plan. In other
words, higher assets do not necessarily affect saving; they do so only if, on
account of unexpected variations, assets turn out to be out of line with income
and age: it is only an excess (or shortage) of assets that affects the saving ratio
(see equation II.2¢). 54
Finally, we can see from our equation (II.1) that the cross-section marginal rate
of change of consumption (or saving) with respect to asset holdings (income and
income expectations constant) could not yield a reliable estimate of the marginal
propensity to consume with respect to assets. The reason is simple. From (II.1),
it follows that this marginal propensity is
∂c
∂
∂ a
=- s
∂ a
= 1 .
L t
(II.15)
This expression is independent of assets and income but depends on age. We
cannot, therefore, properly speak of the marginal propensity to consume with
respect to assets, as this quantity will vary substantially from age group to age
group, tending to increase with age.
Let us finally remember that, in order to compute the individual marginal
propensity from cross-section data, it is also not sufficient to control age by introducing
this variable linearly in a linear regression of consumption on income and
assets, 55 for, according to our model, age does not enter in a linear fashion. The
only way of estimating the marginal propensity at various ages and, in the
process, test equation (II.15) is to carry out a full stratification by age groups (or
some equivalent procedure). It is to be hoped that data for such a test may sometime
be available. 56
II.6
Uncertainty, Saving, and the Composition of Assets
The analysis of the previous sections is helpful in providing a justification for our
earlier contention that the phenomenon of uncertainty can be neglected without
seriously affecting the usefulness of the analysis.
As we have seen, even under the assumption of certainty there are sufficient
incentives for the household to accumulate assets at a rapid rate during the early
years of its life. Since the assets thus accumulated can be used to acquire durable
goods and are also available as a general reserve against emergency, it would
appear that the last two motives (p. 6), which are the result of uncertainty, need
not affect significantly the saving behavior. 57