Experiments on saving behavior reveal substantial heterogeneity of behavior and performance. We show that this heterogeneity is reliable and examine several potential sources of it, including cognitive ability and personality scales. The strongest predictors of both behavior and performance are two cognitive ability measures. We conclude that complete explanations of heterogeneity in dynamic decision making require attention to complexity and individual differences in cognitive constraints.

This paper provides experimental evidence of the role of higher order risk attitudes—especially prudence—in prevention behavior. Prudence, under an expected utility framework, increases (decreases) self-protection effort compared to the risk neutral level when the risk of losing part of an income exists in a future (the same) period. Motivated by these predictions that give the exact test on prudence, an experiment was designed where subjects go through higher order risk attitude elicitation and make a self-protection decision. In contrast to the expected utility theory, the observed efforts are less than the risk neutral level, regardless of the timing of loss. This violation of expected utility predictions can be explained by probability weighting.

This paper tests how subjects behave in an intertemporal consumption/saving experiment when borrowing is allowed and whether subjects treat debt differently than savings. Two treatments create environments where either saving or borrowing is required for optimal consumption. Since both treatments share the same optimal consumption levels, observed consumption choices can be directly compared across treatments. The experimental findings imply that deviations from optimal behavior are higher when subjects have to borrow than when they have to save in order to consume optimally, suggesting debt aversion. Signifiant under-consumption is observed when subjects have to borrow in order to reach optimal consumption. In line with previous experiments, weak evidence is found suggesting that subjects over-consume when saving is necessary for optimal consumption.

The Government Savings Bank of Jamaica (GSB) was created post-emancipation in order to serve the poor as a vehicle for precautionary savings and has been viewed as largely successful in this goal, at least after its restructuring in the late 1860s. We investigate this by examining GSB depositor behaviour after income shocks due to hurricanes. To this end, we combine digitized parish-level GSB account information with a hurricane damage index generated from historical storm tracks. Our results show little evidence of a precautionary savings motive by GSB account holders in that while net account balances and deposits drop after hurricanes, withdrawals and the number of accounts closed also fall. Additionally, the net decrease in account holders seems not to be driven by small savers, who are likely to be the poorest. Our findings are thus more in line with the GSB potentially being used to finance non-necessary consumption.

We study a growth model with two types of agents who are heterogeneous in their degree of family altruism. We prove that every equilibrium path of consumption, bequests, and capital converges to a unique steady state and study the effect of altruism on the properties of steady-state equilibrium. We show that aggregate income is positively related to both level of altruism and altruism heterogeneity. When altruism heterogeneity is low or moderate, income inequality follows an inverse U-shaped pattern relative to the level of altruism. These observations are consistent with the cross-country Kuznets curve linking different steady-state levels of income to steady-state levels of inequality. When altruism heterogeneity is high, income inequality decreases with the level of altruism. Our results suggest that heterogeneous altruism is a possible mechanism linking economic growth and income inequality.

This paper studies the heterogeneity of households’ present bias in a heterogeneous-agent model. Our model jointly matches the average marginal propensities to consume and the wealth distribution in the USA, even when all wealth is liquid. A fiscal stimulus targeting households in the bottom half of the wealth distribution improves the consumption response. A financial literacy campaign removing present bias gets naive households out of the debt trap but harms sophisticated households’ wealth accumulation due to a lower equilibrium interest rate. Finally, we show that a borrowing cost penalty and illiquidity both discipline excessive borrowing and are therefore potential remedies for present bias and naivete.

A comparison of the performances of pension products that ignores long-term trends might significantly overestimate the long-term impact of volatility risks while underestimating the impact of persistent, low-frequency trends. This paper proposes a comparison making use of projection models based on the long-term risk–return tradeoff proposed by Campbell and Viceira (2005) to explicitly take into account slow-moving economic trends. In order to illustrate the approach and its implications, we discuss the capital protection provided by life-cycle target-date fund strategies and minimum guarantee strategies.

This article explains a curious redirection of economic policies that uses the policy framework of Kalecki and Keynes only to undermine it. It does not negate their theory of demand management, but reformulates it to serve the powerful interests of finance in the era of financial globalisation. As a result, accountability to finance rather than to the citizens becomes more important for democratic governments, and credit rating dominates democratic performance.

We use Canadian data over the period of 1991Q1 to 2019Q2 to examine the effect of higher minimum wages on consumption, measured as the real retail trade sales per adult population. Such an examination is rare in the extant literature and it is timely given the increasing debate concerning the stimulus versus inflationary effects arising from wage polices because of COVID-19 global pandemic. We apply the autoregressive distributed lag model to determine the causal relationship between these variables. We find one long-run cointegrating relationship that runs from the real minimum wage to the real retail trade sales. In addition, we find that a 1% increase in the minimum wage is associated with almost a 0.5% increase in real retail trade sales in the long run. While our findings rest on several statistical assumptions, there is strong evidence in support of the position that minimum wage strengthens aggregate consumer spending, and thereby the standard of living, economic growth and stability. This is a position that differs from the conclusions drawn from mainstream academic and policy debates on the economic usefulness and efficacy of minimum wage increases.

We quantify the importance of idiosyncratic health risk in a calibrated general equilibrium model of Social Security. We construct an overlapping generations model with rational-expectations households, idiosyncratic labor income and health risk, profit-maximizing firms, incomplete insurance markets, and a government that provides pensions and health insurance. We calibrate this model to the US economy and perform two computational experiments: $\left (i\right)$ cutting Social Security’s payroll tax, and $\left (ii\right)$ modifying Social Security’s benefit-earnings rule. Our findings suggest that health risk amplifies the welfare implications of both experiments: downsizing Social Security always leads to higher overall welfare, but the welfare gain is larger when we account for health risk, and increasing the progressivity of Social Security’s benefit-earnings rule has a larger positive effect on welfare in the presence of health risk. We also find that allowing households additional tools to self-insure against health risk weakens the precautionary motive, so our experiments have similar welfare implications both with and without health risk.

We use administrative data on federal civilian workers' accounts in their employer-provided defined contribution plan, called the thrift savings plan (TSP), to provide new evidence on the effects of employer matching and defaults on workers' savings behavior. The empirical analysis relies on exogenous variation stemming from two natural experiments caused by policy changes to the TSP: the establishment of an employer match for workers hired after 1983 and the introduction of automatic enrollment for workers hired after July 2010. We find that the introduction of the employer match lead to a higher increase in both participation and contribution rates compared to the subsequent switch to automatic enrollment. In terms of portfolio allocations, we find that matching and automatic enrollment had small and minimal effects, respectively.

Income drops permanently after an involuntary job displacement, but it has never been clear what happens to long run wealth in the USA. Upon displacement, wealth falls 14% relative to workers of the same age and similar education from the Panel Study of Income Dynamics (PSID). Their wealth is still 18% lower 12 years after the event. A standard life cycle model calibrated to US data with permanent decreases in income after displacement behaves differently than these findings. The agents in the model also experience a large drop in wealth but they recover. The biggest culprit for these differences is small and statistically insignificant changes to consumption in the PSID whereas agents in the model decrease their consumption considerably. Extending the model to include habit formation reconciles some of these differences by generating similar long run effects on wealth. This allows for the examination of wealth at death through the lens of the model.

This paper examines the impact of uncertainties in the future trends of mortality on annuity values in Singapore's compulsory purchase market. We document persistent population mortality improvement trends over the past few decades, which underscores the importance of longevity risk in this market. Using the money's worth framework, we find that the life annuities delivered expected payouts valued at 1.019–1.185 (0.973–1.170) per dollar of annuity premium for males (females). Even in a low mortality improvement scenario, the annuities provide an expected value exceeding 0.950. This suggests that participants in the national annuity pool have access to attractively priced annuities, regardless of sex, product, and premium invested.

We derive optimal portfolio choice patterns in retirement (ages 66–105) for a constant relative risk aversion utility maximising investor facing risky capital market returns, stochastic mortality risk, and income-reducing health shocks. Beyond the usual stocks and bonds, the individual can invest his assets in tontines. Tontines are cost-efficient financial contracts providing age-increasing, but volatile cash flows, generated through the pooling of mortality without guarantees, which can help to match increasing financing needs at old ages. We find that a tontine invested in the risk-free asset dominates stock investments for older investors without a bequest motive. However, with a bequest motive, it is optimal to replace the tontine investment over time with traditional financial assets. Our results indicate that early in retirement, a tontine is only an attractive investment option, if the tontine funds are invested in a risky asset. In this case, they crowd out stocks and risk-free bonds in the optimal portfolios of younger investors. Over time, the average optimal portfolio weight of tontines decreases. Introducing systematic mortality risks noticeably reduces the peak allocation to tontines.

We compare two contracts for managing systematic longevity risk in retirement: a collective arrangement that distributes the risk among participants, and a market-provided annuity contract. We evaluate the contracts’ appeal with respect to the retiree's welfare, and the viability of the market solution through the financial reward to the annuity provider's equityholders. We find that individuals prefer to bear the risk under a collective arrangement than to insure it with a life insurers' annuity contract subject to insolvency risk (albeit small). Under realistic capital provision hypotheses, the annuity provider is incapable of adequately compensating its equityholders for bearing systematic longevity risk.

The revealed preference for dominated insurance-based personal pension plans (PPPs) in Italy is a decade-long puzzle. I surmise that a motivation from the supply side is a sales force factor deriving from the geographical distribution of financial providers, including the countrywide network of the state controlled Post Office. I provide supporting evidence using three biennial waves of the Bank of Italy's survey on household finances from 2010 to 2014. The time interval includes a public pension system reform sharply raising the statutory age retirement, legislated in December 2011 to defuse a sovereign debt crisis. I show that the salience effect on the awareness of the benefits of supplementing lower perspective public pensions with PPPs increased the explanatory power of financial strength indicators. Exploiting a module in the 2010 wave I estimate a surprising decrease in the probability of subscription to PPPs in 2014 associated with the indicator for the highest financial literacy level.

The paper tests the idea that major demographic shifts can affect housing prices. We first build an overlapping generation model and analytically solve for the equilibrium price of the asset. The model predicts that economies with a higher fraction of old people in the overall population have lower house prices. We empirically test this hypothesis using data on house prices and demographic variables from the Organization for Economic Co-operation and Development (OECD). We find that if population growth increases by one percentage point, house price growth increases by 1.4 percentage points.

Using novel microdata, we explore lifecycle consumption in Sub-Saharan Africa. We find that households' ability to smooth consumption over the lifecycle is large, particularly, in rural areas. Consumption in old age is sustained by shifting to self-farmed staple food, as opposed to traditional savings mechanisms or food gifts. This smoothing strategy indicates two important costs. The first cost is a loss of human capital as children seem to be diverted away from school and into producing self-farmed food. Second, a diet largely concentrated in staple food (e.g., maize in Malawi) in old age results in a loss of nutritional quality for households headed by the elderly.

It has been long suggested that public pension wealth may crowd out household savings. However, there remains controversy about the extent of this displacement effect. In this paper we use an original microsimulation model based on retrospective survey data collected through the third wave of the Survey of Health, Ageing and Retirement in Europe (SHARE) to estimate the displacement effect of public pension wealth on other wealth in Belgium. Combining this rich dataset with an accurate estimation of the individual pension entitlements allows us to circumvent some of the main measurement error problems faced by previous studies. We estimate that an extra euro of public pension wealth is associated with about 14–25 cent decline in households’ non-pension wealth.

This paper summarizes recent developments in Dutch occupational pensions of both the defined contribution and defined benefit (DB) types. A reform of DB schemes is discussed that introduces financial assets as individual entitlements. At the same time, the reformed schemes derive (dis)saving, financial risk management and insurance decisions from the explicit objective of adequate and stable lifelong retirement income. The proposed system also involves an insurance contract pooling longevity risks and possibly collective buffers that share systematic risks with future pension savers. The paper identifies the strengths and weaknesses of the Dutch contract design and draws lessons for other countries.