IQ in the Utility Function: Cognitive Skills, Time Preference, and Cross-Country Differences in Savings Rates

Abstract

Social science research has shown that intelligence is positively correlated with patience, while growth theory predicts that more patient countries will save more. In a closed economy, that means high average IQ countries will become more capital-intensive. In an open economy, high average IQ countries will hold a greater share of the world’s widely-traded assets. We provide the first empirical evidence that in today’s world, presumably somewhere between the closed-economy and open-economy benchmarks, both predictions hold true: Countries whose residents currently have the highest average IQs have higher capital-output ratios and higher ratios of U.S. Treasuries to nominal GDP.

Keywords: Ramsey, Time Preference, Intelligence, Human Capital, Savings

JEL Classification: E21, J24, O41