AEAweb: JEL: Contents: December 1996

Journal of Economic Literature
Vol. 34, No. 4, December 1996

Contents

Household Saving: Micro Theories and Micro Facts
Martin Browning and Annamaria Lusardi      1797

Economic Reform in New Zealand 1984-95: The Pursuit of Efficiency
Lewis Evans, Arthur Grimes and Bryce Wilkinson      1856

Economics in a Family Way
Theodore C. Bergstrom      1903

The Homeless
John M. Quigley      1935

In this survey, we review the recent theoretical and empirical literature on household saving and consumption. The discussion is structured around a list of motives for saving and how well the standard theory captures these motives. We show that almost all of the motives for saving that have been suggested in the informal saving literature can be captured in the standard optimizing model. Particular attention is given to recent work on the precautionary motive and its implications for saving and consumption behavior. We also discuss the "behavioral" or "psychological" approach that eschews the use of standard optimization techniques and focuses instead on direct consideration on saving. We provide a section on facts: who save and how much. We then discuss informally the recent decline in the U.S. saving rate and whether the theory is of much use in understanding this and other changes in aggregate saving rates over time. We do not find any convincing explanation for the change in saving rates. We also discuss some analyses of saving behavior over the life-cycle, addressing such questions as whether households save "enough" for retirement and whether the consumption patterns of older households can be rationalized within a simple life cycle model. We also review a great number of studies of the consumption Euler equations. Based on our analysis of the studies cited we conclude that there is still mixed evidence that consumption is excessively sensitive to income. We also examine in depth the recent empirical literature on the precautionary motive. We conclude that although some households do seem to have a significant precautionary motive at some points in their life cycle, this motive is not so strong empirically as some investigators suggest.

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Between 1984 and 1995 New Zealand changed from a closed and centrally controlled economy to one of the most open countries in the OECD. The reforms liberalizing the economy were notable for their very comprehensive coverage and innovations that included: performance contracts for senior civil servants and the central bank, legislated constraints on fiscal expenditure decisions backed by accrual accounting, tax neutrality, subsidy-free agriculture, and no industry-specific regulation of competition. Modern microeconomics contributed much to policy design. Economic growth has been vigorous since 1991, but a different sequencing of reforms may have enhanced outcomes.

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This paper argues that the economics of the family can be much enriched by incorporating recent developments in evolutionary biology, animal behavior studies, cultural evolution, anthropology, and game theory. Evolutionary foundations of sympathy between relatives are explored. Applications of the theory of cultural evolution to the demographic transition and to wealth transfers between generations are investigated. The economics of marital institutions such as polygyny, polyandry, and matriarchy are discussed, as well as recent work by economists on non-monogamous mating arrangements in our own society. Applications of recent developments in non-cooperative bargaining theory and matching theory to the theory of marriage are presented.

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Beginning in the late 1970s, the incidence of homelessness increased substantially--especially in American cities. Most analyses of the rise of homelessness emphasize social pathologies--mental illness, drug abuse, criminal behavior--in explaining the appearance of the "new homeless." This paper reviews Brendan O'Flaherty's monograph Making Room, which, in contrast, advances a purely economic theory of the rise of homelessness. According to this novel theory, the rise of homelessness can be attributed to the increased dispersion in the income distribution during the past 15 years. The paper reviews and criticizes the empirical evidence supporting O'Flaherty's theory and its policy implications.

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