Liquidity Constraints and Buffer Stock Savings: Theory and Experimental Evidence

87 Pages Posted: 13 Nov 2020 Last revised: 17 May 2021

See all articles by John Duffy

John Duffy

University of California, Irvine

Andreas Orland

Universit├Ąt Potsdam

Date Written: May 16, 2021

Abstract

We provide a direct, experimental test of the buffer stock model of savings behavior. We use a three-period inter-temporal model of consumption/savings decisions where liquidity in the second period is constrained (and, thus, borrowing is not possible). We contrast behavior in this constrained version of the model with an unconstrained version where there is no liquidity constraint. A second treatment variable is the variance of the stochastic income process, resulting in a 2x2 experimental design. We test the comparative statics predictions of the model and find that, in contrast to these predictions, the liquidity constraint does not increase savings in the first period of the constrained model relative to the first period of the unconstrained model. However, we find strong support for all the other comparative statics predictions of the model, e.g., the impact of a higher variance of income on savings behavior and differences between period 1 and period 2 savings. In further analyses, we find that we can rationalize the departures we observe from model predictions by some combination of debt aversion, heterogeneity in cognitive abilities and/or learning.

Keywords: Experimental Economics, Inter-Temporal Optimization, Liquidity Constraints, Consumption, Saving, Debt Aversion

JEL Classification: C91, D92, E52

Suggested Citation

Duffy, John and Orland, Andreas, Liquidity Constraints and Buffer Stock Savings: Theory and Experimental Evidence (May 16, 2021). Available at SSRN: https://ssrn.com/abstract=3672126 or http://dx.doi.org/10.2139/ssrn.3672126

John Duffy

University of California, Irvine ( email )

Department of Economics
3151 Social Science Plaza
Irvine, CA 92697
United States
949-824-8341 (Phone)

Andreas Orland (Contact Author)

Universit├Ąt Potsdam ( email )

Faculty of Economics
Potsdam, DE 14482
Germany

HOME PAGE: http://https://www.uni-potsdam.de/de/vwl-mwi/team/orland

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