Precautionary Savings Research Articles

Does It All Add Up? New Experimental Evidence for 'Undersum Bias' as an Impediment to Precautionary Saving

Does It All Add Up? New Experimental Evidence for 'Undersum Bias' as an Impediment to Precautionary Saving

Medical insurance, health risks, and household financial asset allocation: evidence from China household finance survey.

There is a lack of micro evidence on whether medical insurance may optimize the household financial asset allocation by transferring health risk, despite the fact that health risk is a significant component driving families' precautionary savings. This article empirically examines the impact of health risk and social medical insurance on household risky financial asset allocation using a Probit model, based on data from the 2015-2019 China Household Finance Survey (CHFS). The findings indicate that social medical insurance, with its lower level of security, reduces the likelihood, but it can alter households' preferences for risk by lowering marginal effect of health risk. According to the findings of the heterogeneity analysis, people who live in rural and less developed areas are more likely to experience the risk-inhibiting effects of social medical insurance and health risk. The eroding and risk-suppressing impacts of social medical insurance are likewise less pronounced for households headed by women and older people, as is the health risk's suppressive influence on household involvement in risky financial markets. Compared with social medical insurance, commercial medical insurance with a higher level of coverage can dramatically increase household participation in riskier financial markets. This article provides micro-empirical evidence for the household asset allocation effect of medical insurance.

The effects of climate change on the natural rate of interest: A critical survey

AbstractThis survey reviews the literature about the possible impacts of climate change on the natural rate of interest (r*), an important yardstick for monetary policy. Prima facie, economic, and financial developments can lower r* in scenarios with increasing climate‐related damages and uncertainty that reduce productivity growth and raise precautionary savings. Orderly climate policies have a pivotal role in facilitating the transition to a carbon‐neutral economy and supporting a steady investment flow. We discuss the main models used to simulate the effects of climate change on r* and summarize the outcomes. However, in scenarios that assume innovations and investments induced by transition policies, r* could be affected positively. Overall, the downward effects of climate change on r* can be substantial, even considering the high degree of uncertainty about the outcomes, with tipping points and nonlinear effects aggravating the economic impacts. The downward pressure on r* will further challenge monetary policy in the long run, by limiting its policy space.This article is categorized under: Climate Economics > Economics and Climate Change Assessing Impacts of Climate Change > Evaluating Future Impacts of Climate Change

Corporate financialization during broadband upgrade

The real sector (RS) is undergoing a process of corporate financialization. Using the data from Chinese listed firms, this study employs the “Broadband China” policy as a quasi-natural experiment to investigate the financialization impact of broadband upgrade. We find that the “Broadband China” policy significantly reduces RS firms’ financialization. Additionally, with China's broadband upgrade in progress, the relative return on real investment does not increase, implying that the profit-seeking effect is not the driving force behind suppressing corporate financialization. Further analysis suggests that this suppression is likely driven by the upgrade's precautionary savings effect via alleviating corporate financing constraints.

Does cybersecurity risk stifle corporate innovation activities?

Cybersecurity risk has become a major concern for organizations due to its potential impact on a variety of corporate activities. This paper examines the impact of cybersecurity risk on corporate innovation activities and uncovers two important channels: risk-taking and precautionary savings. Employing textual analysis and machine learning techniques to estimate firms' ex-ante cybersecurity risk for a sample of U.S. listed firms, we show that cybersecurity risk is negatively related to corporate innovation. We address potential endogeneity biases and find the results to remain unchanged. Furthermore, our results are robust to alternative proxies, truncation issues, and external cybersecurity risk. We uncover the mechanisms underlying the main result by showing that the effects are more pronounced for firms with lower tolerance to risk and lower cash savings. Innovations of smaller, financially constrained firms and firms belonging to high cybersecurity risk and technology-intensive industries are affected more.

Bequest motives and the Social Security Notch

Bequests may be a key driver of late life savings behavior and more broadly, a determinant of intergenerational inequality. However, distinguishing bequest motives from precautionary savings is challenging. Using data from the Health and Retirement Study, we exploit an unanticipated change in Social Security benefits, commonly called the Social Security Notch, as an instrument to identify the effect of benefits on bequests. We match data moments generated by the Notch with a model of late life savings behavior that accounts for mortality risk and unobserved expenditure shocks to identify bequest motives. The model is used to decompose the importance of bequest motives as a driver of late life savings by comparing asset profiles with and without utility from bequests. We find that roughly 40% of accumulated assets and bequests are attributable to bequest motives among retirees. Our policy counterfactual features a more progressive Social Security benefits schedule that reduces benefits for the richest retirees. We show that although wealth declines, consumption remains largely unchanged since wealth generated by bequest motives acts as a cushion against benefit reduction.

Age-dependent risk aversion: Re-evaluating fiscal policy impacts of population aging

The existing literature on fiscal unsustainability in the United States often evaluates three alternative policies: increasing the payroll tax rate, reducing pension benefits, and extending the retirement age. Studies suggest that reducing the replacement rate and increasing the retirement age provide higher welfare for future generations. However, these studies often assume constant risk aversion (CRA), which contradicts the empirical evidence that suggests risk aversion tends to increase with age. To provide a more comprehensive understanding of risk aversion, life-cycle behavior, and welfare under uncertainties, this study integrates age-dependent increasing risk aversion (IRA) into an overlapping generations model with risk-sensitive preferences. The quantitative analysis shows that individuals who exhibit IRA tend to adjust hours worked to reduce income risk and accumulate more precautionary savings to ensure future consumption. However, reducing uncertainty consumes resources that could otherwise have been used to increase overall consumption and leisure. Individuals who expect to become more risk averse in old age may prefer an increase in the payroll tax rate over the other two options, as the latter would result in relatively higher uncertainty.

Firm-level political risk and external financing choices

This study investigates the association between firm-level political risk and external financing choices. We find that firm-level political risk is positively related to net equity issuance but is insignificantly associated with net debt issuance. The evidence shows that precautionary savings, market timing, and internal financial constraints could explain the positive relation between firm-level political risk and net equity issuance. Overall, our findings suggest that firms exposed to higher political risk issue more equity than debt as a source of external financing.

Precautionary motive or private benefit motive for holding cash: Evidence from CEO ownership

This study examines how CEO ownership affects the motivation of firms to hold cash. We document a monotonic and positive relationship between CEO ownership and cash holdings. The effect is more pronounced for firms with higher firm-specific risk and larger external financing costs, suggesting that CEO ownership encourages firms to hold more cash as precautionary savings. However, we find no evidence that CEO ownership leads to cash hoarding in firms with weak corporate governance. Moreover, we show that firms with high CEO ownership and excess cash holdings have more capital expenditures and R&D expenses but do not have higher dividend payments and share repurchases. Nonetheless, shareholders’ perceived value of cash increases with CEO ownership, indicating that shareholders place a positive value on high levels of cash holdings associated with CEO ownership in the context of growing investment prospects. Overall, our findings support the notion that firm ownership aligns the interests of CEOs and shareholders, rather than encouraging managers to extract private benefits through hoarding cash.

Age‐ and health‐related non‐linear inheritance taxation

AbstractThis paper studies the design of optimal non linear bequest taxation when individuals differ in wage, survival and probability to become dependent at the old age. Following the recent health and economic literature, we assume that agents with higher wage have higher survival chances and lower risks to become dependent. Agents make precautionary savings for their old age taking into account the uncertainty on their health. They exhibit joy of giving utility, so that they also set aside money for their heirs. In the absence of annuity and long‐term care (LTC) insurance markets, heirs obtain different levels of bequests, depending on whether the donor died early or late in life and whether he was healthy at time of death. We assume that the government does not observe the decomposition of bequests between voluntary and involuntary ones. Instead, it observes the timing of death and the health condition at death of the donor. We show that, under asymmetric information, on top of marginal income taxation, the bequests left by low‐income individuals in case of early death should be taxed at the margin. To the opposite, bequests obtained later in life need not be taxed or subsidized at the margin.

Wage rigidity and destabilizing spirals

This paper investigates the impact of real wage rigidity on the (de)stabilizing role of demand feedback. I show that destabilizing supply–demand feedback driven by countercyclical precautionary savings demand against uninsured unemployment risk is fundamentally a matter of rigid real wage adjustments over business cycles. Given the estimated wage rigidity consistent with aggregate labor market dynamics in the United States, the quantitative results suggest that the unemployment risk channel has a minor impact on aggregate volatility.

Precautionary savings and rural‐to‐urban migration: Evidence from Chinese hukou status

AbstractRural‐to‐urban migrants account for more than one‐third of the total population in China. However, because of China's hukou system, urban migrants can have limited access to different public services in urban areas. Consequently, this can affect their consumption and savings behaviour. However, little is known about how the hukou system changes migrants' allocation of savings across different savings instruments. In this study, we utilize the 2013 round of the Urban and Rural Residents Income Distribution and Living Conditions Survey of China to see if migrants' hukou status affects allocation between short‐term and long‐term assets. Propensity score matching is used to match migrants with migrants who have obtained urban hukou. When comparing the urban migrants having rural hukou with hukou holders who converted their hukou from rural to urban, we find that the migrants hold significantly higher proportions of savings in cash and other short‐term assets. Those who have obtained urban hukou, appear to hold a greater share of their portfolio in long‐term, higher returning assets. The differences in portfolio allocations appear to be larger for migrants with lower household income. We argue that these results are consistent with savings behaviour driven by a precautionary motive.

Preference Shifts During Health Shocks: Foreign Tourists’ Expenditure–Price Elasticity Throughout the Pandemic

This study evaluates the changes in the expenditure–price elasticities of foreign tourists in the summer periods of 2019, 2020, and 2021. We first develop a theoretical characterization that combines microeconomic, loss aversion, price inequality and precautionary savings theories. Next, exploiting microdata for more than 34,000 foreign tourists visiting Spain, we estimate OLS and quantile regressions to empirically examine the expenditure elasticities with respect to the prices of transport services, leisure activities and bars and restaurants at the destination (17 regions). We find that (i) the expenditure–price elasticity of transportation (leisure activities) increases (decreases) during the pandemic, whereas that of bars and restaurants remains unchanged, (ii) foreign tourists are comparatively less expenditure–price elastic at high expenditure levels in transportation and bars and restaurants, and (iii) expenditure–price elasticities are highly heterogeneous depending on the origin country. Managerial and theoretical implications of the findings for firms’ pricing strategies are discussed.

Public long-term care insurance and consumption of elderly households: Evidence from China

This study investigates the impact of long-term care insurance (LTCI) on the non-health consumption of elderly households. By exploiting a quasi-experiment on the public LTCI pilot program in China, we identify the effect of LTCI using a triple-difference approach. Using longitudinal data from the China Health and Retirement Longitudinal Study, we find that LTCI has led to an increase in the non-health consumption of elderly households by 15.7%, mostly observed in households having no older members with need for long-term care (LTC). Further evidence suggests that the effects are stronger for households with higher expected LTC risks, less wealth or family insurance, and covered by more generous schemes. Finally, LTCI increases the expectation of using formal LTC when disabled and subjective longevity expectations for older adults having no need for LTC. Overall, these findings offer empirical support for the role of LTCI in mitigating precautionary savings against LTC risks.

Research on the influence mechanism of child dependency ratio on household saving rate

High family savings rate has always been an important feature of China's economy. With the gradual opening of China's birth policy, the high family savings rate is closely related to children's dependency ratio. Based on the data of CFPS in 2018, the regression results show that: first, the child dependency ratio enhances the precautionary savings of families and increases the household savings rate; Second, generational care makes the parents' lasting income more stable, so under the condition of the same child support ratio, households with generational care have a lower savings rate; Third, the ratio of child dependency in eastern and western families has a significant positive effect on saving rate, while the central region has no significant effect. Finally, it puts forward some suggestions on strengthening social security, advocating intergenerational care and narrowing the gap between East and west China.

Household Behavior (Consumption, Credit, and Investments) During the COVID-19 Pandemic

The 2020 COVID-19 pandemic led to a large number of studies in household finance, using new high-frequency data in close to real time. In this article, we survey household behavior during the pandemic, with a focus on consumption, government policies, credit, and investment. The pandemic induced a rapid decline in consumption, which was affected by but largely preceded stay-at-home orders and was followed by a rapid rebound. Government stimulus was less effective in 2020 relative to other recessions, which is consistent with both shutdowns and precautionary savings. Delinquency rates fell, unlike in other recessions, likely due to government debt relief policies. Household investment behavior was affected by pandemic-induced changes in beliefs. We conclude by discussing avenues for future research.

Terrorism, banking, and informal savings: Evidence from Nigeria

Conflict-affected societies have lower levels of economic growth. The financial development literature argues that one mechanism behind this is conflict increasing instability, lowering savings. However, the development studies literature highlights that conflict increases precautionary savings. I address this ambiguity arguing that savings do not necessarily fall, rather people opt for informal over formal savings channels as the latter are perceived as vulnerable to conflict. Informal savings are not recorded, explaining why some studies find that savings fall. The analysis uses data from the Nigerian General Household Survey Panel and the Global Terrorism Database with a dose response difference-in-difference model, exploiting variation in terrorism events within 500 5-km-squared locations over 2010–2018. The results confirm my intuition and are robust to several exercises, including to potential bias from heterogeneous time-dependent and dynamic treatment effects. Mechanism analysis suggest that post-conflict changes in risk aversity plays a role. The study ends with policy insights.

COVID-19 vaccination and household savings: An economic recovery channel

The COVID-19 pandemic increased people’s propensity for precautionary savings in response to economic recession (e.g., Mody et al., 2012; Gropp and McShane, 2021; Levine et al., 2021). However, as the relevant vaccine roll-out continues, it mitigates people’s concerns and boosts the macroeconomy, which leads to significant declines in household precautionary saving motives. Consistent with this expectation, using U.S. county-level vaccination, deposit, economic, and demographic data, we show that there is a significant negative relationship between COVID-19 vaccination and household savings. We attribute this negative relationship to an economic recovery channel because our findings also suggest that the vaccination has a strong negative impact on the unemployment rate and results in increases in consumer spending. Overall, our study adds to an emerging strand of literature on how COVID-19 vaccination affects households’ financial behaviors.

Private disaster expenditures by rural Bangladeshi households: evidence from survey data

ABSTRACT This paper investigates household’s private expenditures to cope with the harmful losses of climate change and disasters. Using household-level survey data from Bangladesh, this paper finds that disaster-affected rural Bangladeshi households allocate between $499 and $1076 in disaster-related expenditures. Such expenditures are always greater than their relevant precautionary savings, implying that those households may debt-finance their defensive measures. Households with greater precautionary savings spend more: a 100% increase in precautionary savings can increase disaster expenditures by 5%. Moreover, there are considerable regional heterogeneities in household’s disaster expenditures. Increased public sector allocations in addition to carefully designed affordable market-based financing instruments can potentially ease the pressure on disaster-affected households in their fight against the harms of climate change and disaster.

An analysis of precautionary savings practices of professional football players

PurposeThe comparatively high salaries of professional players during their active athletic career should allow them to accumulate an adequate level of precautionary savings for a financially autonomous post-sport career. However, not all players succeed in accumulating sustainable financial assets. Therefore, the question arises how professional players' financial precaution within the social setting football is shaped. As no empirical analyses have yet been carried out on this issue, the study study examines football players' precautionary practices and motives.Design/methodology/approachSemi-structured interviews were conducted with 25 German (former) professional football players. The authors used qualitative content analysis to analyse the data, expanding the analysis to include reconstructive elements to create different precautionary types.FindingsThe results reveal that players deal with both career-specific as well as precaution-related risks quite heterogeneously. Accordingly, three precautionary types characterised by distinct forms of precautionary saving practices are identified. The authors also find that although the players are aware of the uncertainties and risks related to their professional football careers, it does not say much about the concrete implementation of adequate precautionary practices.Practical implicationsThe findings contribute to a better understanding of precautionary saving practices among football players.Social implicationsMoreover, the findings contribute to a better understanding of precautionary saving practices not only specifically among (former) football players, but generally among individuals that face high occupational career risks and earn high salaries to develop preventative concepts and approaches to sustainable financial planning.Originality/valueThis paper is the first empirical study that analyses precautionary savings practices of the specific population of elite athletes in high income sports professional football.