The Effect Of Precautionary Saving On The Behaviour Of Our Country's Residents

Consumption is a broad and crucial domain in economic research. Hence, theories of consumption functions have always been at the cutting edge of economics, which attract so many scholars'attention. Meanwhile, a number of classical theories on consumption play an essential role in economic development.In this thesis, firstly, the author reviews the history of consumption functions and methods to measure the functions. The research on consumption theory and methods to measure the functions can date back to mid-19th century. However, the systematic research started in the 1930s. Keynes was the first person to study consumption function. He mentioned consumption function in his classical thesis"General theories on Employment, Interest and Money"for the first time. Form the 70s to now, a number of economists entered the consumption function field, such as Nobel Laureates in economics Tobin, Simon, Kuznets, Modigliani, Friedman, and obtained so many glorious achievements.Consumption functions can be divided into two parts from the form of macroeconomics: consumption theory under income certainty and under income uncertainty. The consumption theories under certainty includes: the absolute income hypothesis of Keynes, the permanent income hypothesis of Friedman and the life cycle hypothesis. The consumption theories under uncertainty includes : the random walk hypothesis of Hall, the Precautionary savings motive theory mentioned by Leland and improved by Carroll,the Liquidity Theory of Constraints and theλhypothesis.Then, the author reviews the history of the development of precautionary saving theory. Precautionary saving means that if a consumer's risk preference shows risk aversion then he will save in order to avoid the probability of decline in consumption when he is confronted with uncertainty. The uncertainty usually means income and expense uncertainty. Leland and Kimball made tremendous contribution to the development of precautionary saving theories.The main contribution of Leland is that he used the quantitative method of precautionary saving model to reach the conclusion that: consumer will take a more cautious behavior when Third derivative of utility function is positive. The purpose of saving is avoiding income uncertainty shock.The main contribution of Kimball is that he established a new concept-prudence to measure motivation of precaution, which is different from risk aversion. Risk aversion means that when a person faces risk, he always chooses to avoid. Anyhow, prudence means people will take defensive measure. Thus risk aversion and prudence motivation can be differentiated.An important model in precautionary saving theory is Buffer Stock Model. Deaton is the first person to use buffer stock concept to explain precautionary saving motivation. Based on his theory, Carroll improved buffer stock model and depicted the concept in detail. The contents of Carroll's buffer stock theory are: consumers tend to choose higher level of consumption in the future, if they have the precautionary saving motivation and expect they will have higher income in the future, moreover, they are non-patient. Saving is similar to a kind of buffer stock device, whose purpose is maintaining consumption level in hard times and increasing consumption in ideal situations. Consumers will set a ratio of target wealth and permanent income, if below the ratio, precautionary saving motivation will dominate, and saving ratio will be improved. If above the ratio, non-patience will prevail, therefore, consumers will choose lower saving ratio.Data used in this thesis comes from CHNS, which is used for saving model researching in all sorts of uncertainty.Firstly, we calculate variables that we need from the data. These variables include family permanent income, family income uncertainty, wealth-to-income ratio, medical uncertainty. We use two methods to measure the uncertainty: the variance of log of income (VARLY) and the relative equivalent precautionary premium (REPP). VARLY is the empirical method to measure uncertainty, While, REPP is the theoretical method. In the following research, we compare these two methods, then find that VARLY and LREPP are better to fit the precautionary saving model. We make use of variance of sample estimator and the kernel variance estimator. It is well known that when the time serials are so short, variance of sample estimator may exists serious bias. Thus, we use kernel variance estimator to measure variance. During the process of calculating variables, we find that variance of sample estimator is less than kernel variance estimator. The main reason is that kernel estimator can better simulate the probability distribution function than sample estimator, thereby, kernel method can calculate more accurate variance estimator. Moreover, in order to compare the difference of saving model between city and rural, we divide data into three categories: whole data, city data and rural data. In the variable calculating process, we do some analysis based on these variables. Meanwhile, compare the city variables and rural variables.The next step is model estimation. We use the buffer- stock model to research citizens'saving model. We induce the empirical model firstly, then estimate it. So, the start work we need to do is inducing empirical model. The following step is we compare different methods of measuring uncertainty. We make a simple regression of uncertainty which include VARLY, LVARLY, REPP, LREPP and wealth-to-income ratio, in order to judge which uncertainty methods are better to fit the model. The result suggests that VARLY and REPP are better than others. In order to fit the model better, we add three dummy variables which are years of household head education, company household head work in, the nature of company household head work in. In this way, we can control different households'family background, which can make us better compare the relationship between uncertainty and wealth-to-income ratio. In estimation, we find that the reside shows Heteroskedasticity through residual test. So, the method we use to estimate the model is weight ordinary least square (WLS). We also estimate the city and rural model and compare differences between them, in order to certain saving behavior differences between citizens'and country people. Moreover, we also research the main factor on the behavior difference. Meanwhile, we also compare different methods of uncertainty measuring.We also research the influence of medical uncertainty to people's saving behavior m odel. Of course, we also divide data into city part and rural part and compare their differences.After a serial of analysis, we find some characteristics of Chinese inhabitants'saving behavior: 1) we can see from parameter estimation results that the coefficient of income uncertainty is quite large and although the coefficient of medical expense uncertainty isn't that large, it is significant in statistics, which means that there is strong precautionary motivation behind Chinese residents'saving behavior. Uncertainty of income and medical expense are factors that can significantly influence residents'saving behavior patterns. 2) from result of econometric testing, we can find that uncertainty of medical expense can affect people's saving behavior patterns significantly, as its coefficient is significant from statistical perspective.3) We can conclude from the coefficients of age and age squared that Chinese residents'saving behavior follows the buffer stock model. From the comparison between urban and rural areas, we can come to the following conclusion: 1) there is large income gap between urban and rural residents and income of urban residents is much larger than that of rural residents, which is to say that urban residents' saving behavior is less sensitive to medical expense. 2) Medical uncertainty in urban area is much smaller than that in rural area. What's more, the saving behavior of urban residents is less affected by the increase of medical expense uncertainty than that of rural residents. 3) Income uncertainty in rural area is higher than that in urban area and rural residents are more sensitive to income uncertainty than that in urban residents. 4) The effect of education on saving behavior in rural area is larger than that in urban area.Finally, we present some suggestions on how to tackle these problems based on the characteristics of residents'saving behavior and the fact of income gap between urban and rural citizens.