The Use of Wealth to Compare Households' Average Saving

Abstract

To identify the determinants of saving, cross-sectional studies of households usually collect and compare the current values of variables. A frequent difficulty is correlation of the known variables with unknown characteristics of households. Stratification of the sample may not always eliminate such correlation, making for biased estimates. A method of avoiding the bias is to sum the regression equation over the working life of the head of each household, which eliminates much of the correlation between the included independent variables and many of the excluded (unmeasurable) factors. In the new equation, the sum of past saving-income ratios can be approximated by the ratio of net wealth to current year's income. The method involves certain problems of its own, but none that appear to outweigh the advantages. The feasibility of the procedure is illustrated by an analysis of how group pension plans affect non-pension saving.