Please use this identifier to cite or link to this item: http://hdl.handle.net/1946/4293
Precautionary Saving and the Timing of Transfers
Does the timing of transfer payments matter? If the transfers have a regressive payment schedule, with regard to income, then I find that it does. Paying the transfers in the period they accrue rather than with a one period time lag provides households with better insurance against negative income dynamics, especially for liquidity constrained households. Foreward looking households are risk averse and hence accumulate, for consumption smoothing motives, precautionary savings. Immediate payment of transfers aids households in smoothing their consumption and as a result they marginally reduce their precautionary saving.
Here households are heterogeneous and optimize facing uninsurable householdspecific idiosyncratic risks and economy-wide technology shocks. Uncertainties regarding future income greatly effects household behavior. Socializing further insurance from negative income dynamics by changing the timing of transfer payments lowers perceived risks and hence private insurance measures of households. As a result of lower precautionary savings needed the aggregate savings rate marginally changes and the general equilibrium model developed moves to a new steady-state over fifty periods. The acccumulative effect on aggregate capital is that it is 0.65% lower in the new steady-state. The changein savings is very different between households and so is their substitution of leisure and consumption for those savings. Some households increase their consumption while others reduce it but in the aggregate consumption is 0.25% lower in the new steady-state.
The most unifying response of households is that they generally find it optimal to reduce their labour supply. In the new steady-state hours worked and labour supply are reduced by 0.7% and 0.4% in the aggregate, respectively.
Static analysis gives that, for any given capital holding and labour productivity status, the change in household behavior results in greater welfare for overwhelming majority of households. Importantly though, in a dynamic setting under uncertainties the said change in individual household´s behavior results in different optimal consumption, labour supply and capital holding paths for the households and the economy going forward.
With welfare being monotonically increasing in capital welfare is 0.25% lower in the aggregate in the new steady-state. Furthermore, with greater response from low wealth households there is a marginal increase in inequality raising the coeffcients of both wealth and labour income Ginis.