Arnold Kling  

Dear Prudence

PRINT
Economic Impact of the Hurrica... I'm in favor of gas price ceil...

In the latest blogger celebrity deathmatch, Andrew Samwick writes


I will start with a theory advanced most eloquently by a former mentor of mine, Christopher Carroll, who is now a professor at Johns Hopkins. According to his Buffer-Stock Theory, the typical household's saving behavior can be described as the interplay between impatience, the desire to borrow against future income if the latter were not subject to uncertainty, and prudence, the need to save against future uncertainties. If consumers are sufficiently impatient, then they will save only to maintain a target level of wealth, or a buffer-stock, against near-term fluctuations in income. Some research that Chris and I did suggested that the typical consumer was in fact so impatient that saving for retirement would not commence until retirement was only a decade or so away.

...Is there any way we can help consumers behave in a less impatient manner? For this, we turn to the research of David Laibson, a professor at Harvard specializing in behavioral economics and its application to issues of consumption and saving. David's work began with the observation from psychological studies that consumers suffer from a time inconsistency problem -- they are willing to commit today to begin saving tomorrow, even if they might change their minds as tomorrow arrives. Their impatience is only a near-term phenomenon -- they expect to be patient in longer-term decisions. An immediate implication was that illiquidity was a desirable feature of a savings account, since it helped enforce that commitment. This shows why greater access to home equity may be a mixed blessing.


So financial innovation that brings us closer to perfect Elvisness might reduce savings. But it does make investment more efficient.


Comments and Sharing





Return to top