A Permanent Income Hypothesis for the Yugoslav Firm

Abstract

Theory suggests that enterprise savings rates are likely to be low or even zero in an economy of self-managed firms where enterprise capital is socially owned and where external sources of investment finance are available. Surprisingly, these predictions are not supported by available evidence about the savings behaviour of Yugoslav firms during the 1965-1971 period when the economy operated with a virtual absence of government control over enterprise savings decisions and when the legal and institutional structure approximated that of an idealized labour-managed system. The apparent contradiction between theory and reality serves as a starting point for the analysis presented in this paper. An attempt is made to model a simple theory of enterprise savings, based on the permanent income hypothesis applied to the enterprise, which explains the actual savings behaviour of Yugoslav industry during the 1965-1974 period. Section I presents a brief discussion of the prevailing theory of the savings-investment behaviour of the self-managed firm. In Section II, empirical evidence about the magnitude of the important variables identified by this theory is considered for the Yugoslav case, and several arguments are offered to explain the persistence of high savings rates in the Yugoslav economy. Section III develops a simple permanent income hypothesis of the Yugoslav firm which relates target earnings and savings rates out of enterprise income to permanent income prospects and to past earnings rates. A single-equation model based on this hypothesis is then applied to data for 16 industrial sectors and the results are presented and discussed in Section IV. In 11 of the 16 sectors the model provides reasonable, statistically significant results; in eight of these sectors equilibrium or target savings rates were positive during the period of observation. Finally, in Section V some indirect empirical evidence supporting the permanent income hypothesis is examined, and avenues for further research are suggested.