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Long-Run Saving Dynamics: Evidence from Unexpected Inheritances

Martinello, Alessandro LU and Druedahl, Jeppe (2016) In Working Papers
Abstract
Long-run saving dynamics are a crucial component of consumption-saving behavior. This paper makes two contributions to the consumption literature. First, we exploit inheritance episodes to provide novel causal evidence on the long-run effects of a large financial windfall on saving behavior. For identification, we combine a longitudinal panel of administrative wealth reports with variation in the timing of sudden, unexpected parental deaths. We show that after inheritance net worth converges towards the path established before parental death, with only a third of the initial windfall remaining after a decade. These dynamics are qualitatively consistent with convergence to a buffer-stock target. Second, we analyze our findings through the... (More)
Long-run saving dynamics are a crucial component of consumption-saving behavior. This paper makes two contributions to the consumption literature. First, we exploit inheritance episodes to provide novel causal evidence on the long-run effects of a large financial windfall on saving behavior. For identification, we combine a longitudinal panel of administrative wealth reports with variation in the timing of sudden, unexpected parental deaths. We show that after inheritance net worth converges towards the path established before parental death, with only a third of the initial windfall remaining after a decade. These dynamics are qualitatively consistent with convergence to a buffer-stock target. Second, we analyze our findings through the lens of a generalized consumption-saving framework, and show that life-cycle consumption models can replicate this behavior, but only if the precautionary saving motive is stronger than usually assumed. This result also holds for two-asset models, which imply a high marginal propensity to consume. (Less)
Please use this url to cite or link to this publication:
author
and
organization
publishing date
type
Working paper/Preprint
publication status
published
subject
keywords
Inheritance, saving dynamics, consumption, Buffer-stock model, structural, causal, convergence, precautionary, retirement, D14, D91, E21, G11, G40
in
Working Papers
issue
2016:7
pages
79 pages
language
English
LU publication?
yes
id
36ebc5a1-7f0d-45ea-b532-a5092d5aa020
date added to LUP
2016-04-20 16:04:06
date last changed
2025-04-04 15:19:26
@misc{36ebc5a1-7f0d-45ea-b532-a5092d5aa020,
  abstract     = {{Long-run saving dynamics are a crucial component of consumption-saving behavior. This paper makes two contributions to the consumption literature. First, we exploit inheritance episodes to provide novel causal evidence on the long-run effects of a large financial windfall on saving behavior. For identification, we combine a longitudinal panel of administrative wealth reports with variation in the timing of sudden, unexpected parental deaths. We show that after inheritance net worth converges towards the path established before parental death, with only a third of the initial windfall remaining after a decade. These dynamics are qualitatively consistent with convergence to a buffer-stock target. Second, we analyze our findings through the lens of a generalized consumption-saving framework, and show that life-cycle consumption models can replicate this behavior, but only if the precautionary saving motive is stronger than usually assumed. This result also holds for two-asset models, which imply a high marginal propensity to consume.}},
  author       = {{Martinello, Alessandro and Druedahl, Jeppe}},
  keywords     = {{Inheritance; saving dynamics; consumption; Buffer-stock model; structural; causal; convergence; precautionary; retirement; D14; D91; E21; G11; G40}},
  language     = {{eng}},
  note         = {{Working Paper}},
  number       = {{2016:7}},
  series       = {{Working Papers}},
  title        = {{Long-Run Saving Dynamics: Evidence from Unexpected Inheritances}},
  url          = {{https://lup.lub.lu.se/search/files/199645061/WP16_7.pdf}},
  year         = {{2016}},
}