Thursday, February 23, 2012

Divorce risk is good for the savings rate

Savings rates have declined over the last decades in developed economies. Many explanations have been offered for this, including the availability of better insurance that allows to smooth out better potential risks. One other that was suggested was that the higher divorce rates and the larger number of out-of-wedlock children would lead to lower savings because economies of scale in consumption do not kick in. An old paper by Luis Cubeddu and José-Víctor Ríos-Rull dispelled this idea, showing in a model economy that the higher risk of divorce actually increases the savings rate, as people foresee the risk and accumulate precautionary savings.

You may dismiss this theoretical result on the grounds that there is no way that freshly married people foresee increased divorce risk and react by saving more. And that may be why this paper was never published. But they there is now evidence from Italy that there is some truth to this result.
Filippo Pericoli and Luigi Ventura, who do not quote the above study, find that this precautionary saving is actually quite substantial at 11% of overall savings. So there, Italians are more rational than we thought.

1 comment:

Miss Harvard said...

Your blog is very nice. The Cubbedu/Rios-Rull paper was innovative for its time. A recent paper by Santos/Weiss shows how an increase in income risk delayed marriage, for much the mechanism. And, the Vandenbroucke paper on fertility, that you discussed in an earlier post, also works in a similar way. By the way, the paper you mention does not cite C&R. Labor economists are behind the curve on family economics.