Theoretical housing saving rate: The aggregate household saving

Theoretical Model: When comprehensive health insurance is introduced, thehouseholds face two savings decisions or this could affect the householdssaving decision in two ways: i)Substitution effect or Precautionary motive andii)Income effect When a comprehensive health insurance is introduced in aneconomy, households face less uncertainty about their future medical expenses.So, they can reduce their precautionary saving or specifically, the portion ofthe precautionary saving that they thought would need to be spent on futurehealth issues. But, also there is an income effect.

When households have healthinsurance, they have more to spend compared to the case when they didn’t haveinsurance. And, also, they would have to spend less in case of any medicalemergency. So, their income would also increase and they would have moredisposable income to spend.In the end, the result will depend on the overall strengthof the two effects. If the substitution effect is strong, they will increasesavings after the introduction of comprehensive insurance and decrease savingsif the income effect is stronger.Behavioral effect: The actual social insurance is usually followed by theexpectation of such. A government will announce a policy that will result inthe introduction of social insurance policy, starting from a specified date inthe future.At the point of the announcement there is likely to be abehavioral effect on the part of individuals who will be affected by thischange.

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Empirical estimate: The asset accumulation equation is: At+1= At + Yt + trt ? Mt ? Ct………………

(1)Here, Mt= government expensestrt= government transfersYt=Post tax income  The borrowing constraint: At+ Yt + trt ? M? Ct  ? 0   Proposition : Aggregatehousing saving rate:The aggregate householdsaving rate at any time t0, ASratet0 , can beexpressed as:  As there is no change in aggregate disposable income, we canwrite:   Proposition for themedium run: The medium-term effectof the introduction of social health insurance on the aggregate householdsaving rate, is negative when the behavioral effect dominates, and ambiguouswhen the combined effect of savings and disposable income dominates. When the savingsand disposable income dominates, the effect on the aggregate household savingrate depends on the relative magnitudes of the increases in Aggregate savings”AS” and disposable income, “yit”.  So, to observe anincrease in savings, we need to observe a very strong combined effect ofsavings and disposable income In the long run: In the long run, it is expected that the behavioral effectwill be spread among the population or among most of the population.

So, thiseffect will become stronger eventually and the combined effect will most likelybe even smaller compared with the behavioral effect in the long run. So, it isvery likely that in the long run, savings will fall with the introduction ofsocial health insurance.


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