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This thesis addresses household saving behaviour, characterising the extent of self-insurance and public insurance over the life-cycle. Understanding how household saving varies in response to different forms of uncertainty is vitally important. Some risks are not fully insurable when markets are incomplete: for example, it is difficult for private insurers to cover layoff and productivity risk because of moral hazard issues. In these situations saving decisions determine households’ ability to avoid adversity, or to self-insure against such outcomes. While there has been substantial research into the broad questions concerning saving and expenditure choices, issues such as household asset allocation, the adequacy of self-insurance, and the interplay between these decisions and public insurance are less well understood. This thesis investigates these questions, combining theory and empirics in order to further our understanding of the underlying mechanisms of household saving choices. I begin with theory, presenting two structural papers that enrich the basic life-cycle model by increasing the realism of the modelling structure. In the first chapter I formulate a number of extensions to the standard framework, and detail how these permit simultaneous matching of key wealth and asset allocation statistics. In the second, I propose a novel identification strategy that enables us to elicit households’ beliefs about the risk and return of investing in stocks, and allows us to estimate intertemporal allocation parameters harmonising both consumption and financial wealth data. In the third chapter I undertake a reduced form approach to estimate the consumption loss associated with serious health shocks, using the life-cycle model as an organising framework. I develop a systemic analysis of household saving choices in order to better analyse questions about the effectiveness of self-insurance, the degree of preparedness for retirement, and how these respond to different levels of public insurance. |
