Why do the Rich Save More? A Theory and Australian Evidence

13 Pages Posted: 1 Sep 2008

See all articles by Debajyoti Chakrabarty

Debajyoti Chakrabarty

University of Sydney

Hajime Katayama

Waseda University - School of Commerce

Hanna Maslen

University of Sydney - Discipline of Economics

Abstract

We provide a theory to explain the existence of inequality in an economy where agents have identical preferences and have access to the same production technology. Agents consume a health good which determines their subjective discount factor. Depending on initial distribution of capital the economy gets separated into different permanent-income groups. This leads to a testable hypothesis: The rich save a larger proportion of their permanent-income. We test this implication for savings behaviour in Australia. We find that even after controlling for lifecycle and health characteristics, higher permanent income is positively related with higher savings rates and better saving habits.

Suggested Citation

Chakrabarty, Debajyoti and Katayama, Hajime and Maslen, Hanna, Why do the Rich Save More? A Theory and Australian Evidence. Economic Record, Vol. 84, No. S1, pp. S32-S44, September 2008, Available at SSRN: https://ssrn.com/abstract=1260457 or http://dx.doi.org/10.1111/j.1475-4932.2008.00481.x

Debajyoti Chakrabarty (Contact Author)

University of Sydney ( email )

University of Sydney
Sydney, NSW 2006
Australia

Hajime Katayama

Waseda University - School of Commerce ( email )

School of Commerce, Waseda University
1-6-1 Nishi-Waseda Shinjyuku-ku
Tokyo, Tokyo 169 - 8050
Japan

Hanna Maslen

University of Sydney - Discipline of Economics

P.O. Box H58
Australia Square
Sydney, NSW 2006
Australia

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