Does the bequest motive explain savings
behavior?
The importance of the bequest motive relative to precautionary
savings
Tjeerd Havinga
Supervisor: Dr. R. Van Ooijen
October 24, 2016
Abstract
In this paper, we examine the bequest motive and savings using a Dutch Center panel.
We found that the bequest motive does not influence whether individuals save, but does
affects the amount of savings for people who have positive savings. The opposite holds
for precautionary savings. Therefore, our research contradicts the work of Dynan et al.
(2002), who argues that both motives cannot be distinguished. Furthermore, inter vivos
transfers, children and risk avoidance seem to influence whether a bequest motive is
present.
Keywords: bequest, savings, life cycle hypothesis, precaution
1. Introduction
The basic life cycle hypothesis without a bequest motive and uncertainty was introduced
by Modigliani and Brumberg in 1954 and predicts that individuals spread their
consumption over their lifetime by saving cash for periods with low income, as in
retirement. In reality, we see that most consumers do not spread all assets over their life
span and still possess a significant proportion of their assets when they pass away
(Danziger et al., 1982). Literature suggests that this discrepancy might be explained by
uncertainty about for example the time of death or health, which encourages individuals
to save at a higher rate than is necessary out of precaution (Yaari, 1965 & Davies, 1981).
Other scholars propose the bequest motive as a possible explanation for the lack of
dissaving. They reason that individuals might experience an increase in utility when
they leave their heirs a bequest (Barro, 1974). There is no consensus on the significance
of this relation in the literature and little is known about socio-economic factors that
influence whether a bequest motive is present. This is partly because it is proven to be
difficult to distinguish both motives. Dynan et al. (2002) supports this view and argues
that a dollar saved in the present can be used for precautionary purposes and for
bequest purposes in case the dollar isn’t needed for financing unexpected events.
This paper examines the relation between the bequest motive and savings. Does
the presence of a bequest motive in households lead to a higher savings rate? To answer
this question, we analyzed data obtained from a panel of 597 participants by CentERdata
that represents the Dutch population. In this analysis, the effect of the precautionary
motive on savings is included, which allows us to investigate the effect of the bequest
motive relative to the precautionary motive. Furthermore, an analysis is carried out to
identify which socio-economic factors influence whether a bequest motive is present.
We find that the bequest motive does not play a role in deciding whether to save
or not. However, when individuals decide to save, the bequest motive does have a
positive effect on their savings account. The opposite holds for precaution: individuals
with a strong precautionary motive save more often than other individuals, but
precaution does not affect their amount of savings. Therefore, our research contradicts
the work of Dynan et al. (2002), who argues that both motives cannot be distinguished.
Our research has important implications for the development of policies regarding
taxation, wealth redistribution and government debt, as they are partly constructed
based on saving decisions by households.
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Our paper proceeds as follows. The next section presents a brief literature review and
discusses empirical findings related to the bequest motive and precautionary savings.
Section 3 and 4 discuss the data and the model used to carry out the analysis. In section
5 our findings are presented and section 6 summarizes and concludes.
2. Literature review
The bequest motive and the precautionary motive have both been put forward as an
explanation for the lack of dissaving of the elderly. To examine the effect of the bequest
motive on individuals’ savings behavior, it is important to clarify which proportion of
savings originates from this behavior. In reality, it is proven to be difficult to distinguish
between the bequest motive and other saving motives such as precaution. Dynan et al.
(2002) suggests that both motives are overlapping and in general cannot be
distinguished. They reasoned that cash saved in the present can be used in the future for
precautionary purposes as well as for a bequest. If cash was not needed to finance
unexpected events, it can be made available as a bequest to heirs as this provides the
bequeathing individual utility. This view is shared by De Nardi et al. (2015), who
identified that the precautionary motive has a significant influence on saving behavior of
the elderly, but could not disentangle this effect from the bequest motive. Ameriks et al.
(2011) tried to solve this identification problem by asking participants to divide a cash
prize between a part that could only be used for bequests and a part that could only be
used for long-term care. They found that bequest motives are more prevalent than
previously assumed in literature.
The rest of the literature review will discuss both the bequest motive and
precautionary savings. First, the basic life cycle hypothesis and its reliability is
discussed. Then, the role of the bequest motive and precautionary savings in explaining
saving behavior is illustrated.
2.1 The life cycle hypothesis
The life cycle hypothesis has been developed by Modigliani and Brumberg in the 1950’s
and since then has become a fundamental piece in economic theory. The model suggests
that individuals prefer to spread consumption in equal amounts over their lifetime if the
interest rate equals their rate of time preference. Therefore, consumers make different
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saving decisions in different stages of their life. To illustrate this, consider the following
decision problem
max 𝑈(𝐶1,𝑡 ) + 𝑈(𝐶2,𝑡+1 )(1 + 𝛿)−1
(1)
s.t. 𝐶1,𝑡 + 𝐶2,𝑡+1 (1 + 𝑟)−1 = 𝑌1,𝑡 + 𝑌2,𝑡+1 (1 + 𝑟)−1
(2)
where 𝐶𝑡 and 𝑌𝑡 are respectively consumption and income in period 𝑡, 𝑟 is the interest
rate and 𝛿 the rate of time preference. One can see that the satisfaction of future
consumption 𝐶1 decreases when the rate of time preference increases. If the rate of time
preference is higher (lower) than the market interest rate 𝑟, an individual is likely to
borrow (lend) money as he or she attaches more (less) value to consumption in the
present than the market interest rate prescribes. In general, the tendency to borrow is
high during the younger years, as young individuals obtain lower wages due to being
relatively unexperienced. On the other hand, middle aged individuals have a high
propensity to save as they receive high wages. Retired individuals use these savings in a
later stadium to compensate for the absence of labor income during retirement.
Although the life cycle hypothesis has become an essential model in economics,
an ongoing debate takes place between academics about its reliability. Especially the
assumption that the elderly have a high propensity to consume raises questions. Banks
et al. (1998) found that a significant proportion of the drop in consumption that arises
around retirement cannot be explained by the life cycle hypothesis. They suggest that
this drop may be caused by an underestimation of one’s pension wealth or a downward
adjustment in health expectations. Another study using data from the Consumer
Expenditure Survey from the U.S. found similar results and adds that the propensities to
consume are the lowest for the elderly that have reached a very high age (Danziger et al.,
1982).
2.2 Bequest motive
An acknowledged explanation for the lack of dissaving of elderly in the life cycle
hypothesis is the bequest motive. Elderly might decumulate wealth at a slower pace than
the model prescribes, because they wish to engage in intergenerational transfers.
However, not every bequest stems from the same type of behavior. The different reasons
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to leave a bequest can broadly be categorized into paternalistic altruistic bequests,
warm-glow altruistic bequests, strategic bequests and unintended bequests.
Barro (1974) was one of the first to mention paternalistic altruistic bequests in
economics. He proposed that if the government increases its debt in the present, the
current generation will increase their bequest to future generations to help them pay for
future tax raises that are necessary to pay off the increased debt. On a smaller scale,
Becker (1974) came up with the concept of ‘social income’ which he defined as the total
of a person's own income and the monetary value he or she attaches to the relevant
characteristics of others, referred to as social environment. He suggests that the head of
a family is concerned about the wellbeing of his family members and therefore their
utility functions enter the head’s utility function. Thus, leaving a bequest to an heir might
increase the head of the family’s utility. To illustrate this, we extend the life cycle model
as follows,
max 𝑈𝑡 = 𝑉𝑡 + (1 + 𝑅)−1 𝑈𝑡+1
(3)
where 𝑉𝑡 is defined as:
(4)
V𝑡 = U(C1, 𝑡 ) + U(C2,𝑡+1 )(1 + δ)−1
𝑈𝑡 stands for the utility of an individual of generation 𝑡 and depends on the direct utility
the individual receives from one’s own consumption (V𝑡 ) and the indirect utility the
individual receives from the utility of the next generation. 𝑅 is the intergenerational rate
of discount and is strictly positive, which implies that the discount factor for utility of the
1
next generation 1+𝑅 is always smaller than one. As an individual wants to maximize its
utility, one should divide its wealth in such a way that both direct and indirect utility are
maximized. When decreasing marginal utility of consumption is assumed, it is
beneficiary for an individual of generation 𝑡 to leave a bequest to generation 𝑡 + 1 when
the discounted marginal utility of a unit of consumption for generation 𝑡 + 1 is larger
than the direct marginal utility of a unit of consumption for the individual of generation
𝑡 . Because the same holds for the individual of generation 𝑡 + 1 regarding generation
𝑡 + 2 , we can conclude that indirectly every generation takes into account the utility of
all next generations when making financial decisions (Groth, 2003). In other words, a
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bequest increases the utility level of the heir and consequently might indirectly
increases the utility of the person who leaves the bequest as well.
Warm-glow altruism is another type of behavior that explains why people leave a
bequest. In this case an individual does not receive utility from the increase in
consumption the heir can attain by using the bequest, but from the direct act of giving
(Redailli, 2005). Leaving a bequest gives people a so called ‘warm glow’: a positive
feeling a person receives from helping others. For an individual that experiences warmglow altruism it is beneficial to leave a bequest when a sufficient level of wealth is
reached, just as with paternalistic altruism. However, a person with paternalistic
altruism will only leave a bequest if he or she has substantial more wealth than the heir
due to decreasing marginal utility of consumption. A person with warm-glow altruism
will leave a bequest independent of the wealth level of the heir and his marginal utility
of leaving a bequest is constant.
The bequest motive can also be driven by strategic bequests. This kind of bequest
is adopted to compensate heirs for providing services to the bequeathing individual.
Bernheim et al. (1986) developed a model concerning strategic bequests based on the
assumption that bequests are being used by individuals to influence the behavior of
their heirs. They found that parents with a higher level of bequeathable wealth get more
attention from their children, while parents that choose to hold wealth in nonbequeathable forms get less attention. It is important to note that the behavior of the
heir can only be influenced if promises about the inheritance of the bequeathing
individual are credible. Imagine a parent of a single child threatening with inheritance.
The threat lacks credibility if there is no third party the parent can credibly commit to
leaving the entire inheritance. The cost for the parent to break its promise to the third
party should therefore be sufficiently high, which implies that this third party should
always be a person who the parent cares about very much.
The last type of bequest is the unintended bequest. Due to uncertainty about the
length of life individuals choose to save at a higher rate than is necessary out of
precaution. As already mentioned, this type of bequest is difficult to distinguish from the
precautionary motive. Besides, Bevan and Stiglitz (1980) argue that even an unintended
bequest leads to some increase in utility and an unintended bequest therefore also
interacts with other types of bequests.
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The existence of the bequest motive has been confirmed by a number of scholars. Alessie
et al. (1995) ran a regression using panel data from the Netherlands and found that
households who reported that they considered to leave a bequest indeed saved more.
Alessie et al. (2014) found empirical evidence in favor of strategic bequests over
altruistic behavior in a study concerning individuals aged above 50 by using data from
eleven European countries. Kopczuk & Lupton (2007) found that 75 percent of the
elderly single households plan to leave a bequest and the presence of the bequest motive
leads to a decrease of 25 percent on personal expenditures compared to households
where no bequest motive is present. Furthermore, no significance was found in support
of either the altruistic or the strategic bequest motive.
However, several academics have also questioned the existence of either the
altruistic or strategic bequest motive. Hurd (1989) did not find evidence for a bequest
motive after the examination of consumption and savings patterns of 11,000 elderly
households over the period 1969 through 1979. Instead, the data suggests that parents
distribute their wealth to their children at an earlier point in life trough so called inter
vivos transfers to pay for their education and increase their consumption level. A
frequently mentioned flaw in the altruistic bequest model is that most parents divide
their bequest equally over their children (Alessie et al., 2014). This is inconsistent with
the model, because the model implies that more money should be bequeathed to the
poorest child as an additional dollar would give him more utility than his siblings which
consequently increases the parent’s indirect utility. Perozek (1998) reexamined the
strategic bequest motive by using a different approach than Bernheim et al. (1986) to
test for its existence. Controls were added for individual and family characteristics that
are likely to influence how much attention children give to their parents and found that
after the inclusion of these variables no relation was found between bequeathable
wealth and attention, which causes doubts about the strategic bequest model.
2.3 Precautionary motive
The precautionary motive is another commonly used motive to correct for the
imperfections of the basic life cycle hypothesis. Individuals that save because of a
precautionary motive do so to be prepared for unforeseen circumstances in the future.
In economics, all individuals are considered to be precautious to some extent because
most individuals are risk averse. Therefore, it is not surprising that most scholars who
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did research on this subject found that a precautionary motive was present. Hubbard et
al. (1994) concluded that the inclusion of a precautionary savings motive explains saving
behavior of a large part of the US population. Alessie et al. (1999) used three datasets
from the Netherlands to investigate whether health, the bequest motive and precaution
affect the lack of dissaving under the elderly. He found that all three variables affected
savings, but classified precaution as the prevalent motive.
An important reason for individuals to engage in precautionary saving is
uncertainty about their health. The relation between health and savings has gained
interest because an increase in different types of insurances, such as health insurances
and disability insurances, has been observed during the last 70 years in the US. At the
same time, the saving rate of US citizens has declined. These observations lead to the
idea that savings might be a buffer to pay for unforeseen and uninsured health
expenditures (Kotlikoff, 1986). This inspired Ameriks et al. (2011) to introduce the
concept of public care aversion, which is defined as a retiree’s aversion to
simultaneously run out of wealth and being in need of long-term care. They found that
public care aversion is the central driver of precautionary savings in the US by
investigating the relation between pubic care aversion and consumption. It should be
noted that the role of public care aversion may be different in other countries because of
regulatory differences. European citizens for example experience less health uncertainty
as they are required to have a health insurance by law. This might dampen the effect of
health uncertainty on savings. It is difficult to examine the effect of health uncertainty as
it is hard to quantify the monetary value of the probability that someone is hit by a
negative health shock. Kotlikoff (1986) used a highly stylized model, but did observe
that saving for uncertain health expenditures might explain saving rates to a large
extent. Another study by Palumbo (1999) found similar results and his health
uncertainty model approaches actual consumption levels more closely than the life cycle
model with lifetime uncertainty.
Precautionary savings are also driven by the simple fact that individuals are
uncertain about the length of their life. Yaari (1965) was the first to look into the effects
of lifetime uncertainty and argues that it leads to an increase in consumption impatience
when the marginal utility of consumption exceeds the marginal utility of leaving a
bequest. By using income and survival data Davies (1981) showed that lifetime
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uncertainty leads to a higher level of savings and suggests that it is a crucial factor in
explaining the lack of dissaving of the elderly.
3. Data
This section describes the data used to test whether the strength of the bequest motive
is positively related to savings. Both our sample and the variables used to perform the
analysis are discussed.
3.1 Sample
Data is collected from three modules conducted by CentERdata, an organization that has
collected economic data through an internet panel consisting of 2000 households on a
yearly basis since 1993. This panel is representative for the Dutch population. The first
module named ‘economic and psychological concept’ provides information on the
influence of economic and psychological factors on saving behavior of households. The
second module named ‘health and income’ provides information about the health status
of participants and the amount of income received in the last year. The third module
named ‘long-term care and legacy’ provides information on the spending behavior of the
elderly after they retire regarding long-term care and inheritance. This module has only
been distributed to participants of 55 years and older as younger generations mostly
haven’t considered to leave a bequest or to save for long-term care yet. Therefore, our
sample consists of participants of 55 years and older. All modules were fielded by the
Dutch Household Survey panel in 2014.
The analysis is carried out on a personal level. The ‘long-term care and legacy’
module is taken as a starting point with a sample size of 1101 individuals. After merging
this sample with the samples of the other two modules and deleting all observations
with missing values, we reach our final sample of 597 participants. This corresponds
with a response rate of 54 percent. In table 1 our summary statistics are presented. The
mean age of our sample is 67 years, while 40 percent of our sample is older than 67.
About 50 percent of the participants have a household income between 22.000 and
40.000 euro and 27 percent exceeds this amount. Most of the participants live together
with a partner (80 percent) and 95 percent of the participants have at least one child.
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Furthermore, 7 percent of the participants are in bad health and the final sample
consists for 61 percent of males.
3.2 Variables
From our sample, we used the following variables to test whether the presence of a
bequest motive in households is associated with higher savings.
The independent variable in our analysis is the strength of the bequest motive as
we are interested in its effect on savings. For the strength of the bequest motive we use
two different measurements. The first measurement is constructed by asking
participants on a Likert scale to which extent the bequest motive is of importance for
their saving behavior. The scores of the participants have been normalized to create a
continuous variable ranging from 0 (not important) to 1 (very important). We will refer
to this measurement in our paper as the importance measurement for bequest. Because
it is proven to be difficult to distinguish between the bequest motive and precautionary
savings we added an alternative measurement for the strength of the bequest motive.
The same approach as Ameriks et al. (2011) is used to disentangle both motives. Our
sample was asked to imagine that they had won a cash prize of 250 thousand euro which
they had to divide between a ‘bequest box’ and a ‘long-term care box’. All cash in the
bequest box will be inherited by family and friends after the participant has passed away
and cannot be used for other purposes. The money from the long-term care box can only
be used to finance long-term care expenses such as extensive home nursing or a
luxurious nursing home, which costs 50 thousand euro a year. Hence, the strength of the
bequest motive is measured as the fraction of cash participants have put in the bequest
box. We refer to this measurement as the cash prize measurement for bequest. Both
measurements for the strength of the bequest motive range from 0 to 1. This enables us
to compare the results using both variables in a simple way.
The dependent variable is savings and defined as the amount of money
households have saved in the last 12 months, expressed in thousands of euro. As
participants had to choose between which boundaries in euro their savings behavior
belongs, the average of the lower and the upper boundary of each category is taken to
estimate a person’s level of savings. An individual for example saves 2000 euro in our
estimation if he reported savings between 1500 and 2500 euro. Participants that
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reported savings in the highest category, which is 75 thousand euro or more, save 75
thousand euro in our estimation.
Furthermore, several control variables have been added to the equation.
Precautionary savings is included as Hubbard et al. (1994) concludes that the inclusion
of a precautionary savings motive explains saving behavior of a large part of the US
population. The strength of the precautionary savings motive is measured by asking
participants to which extent precaution is of importance for their saving behavior and
the scores of the participants have been normalized to create a continuous variable
ranging from 0 (not important) to 1 (very important). Time preference is included just
as in the original life cycle hypothesis, because a person who prefers consumption in the
present is likely to have a lower savings rate. Participants are divided in two groups.
Individuals for whom the next year is the most important for planning expenditures and
savings are labeled as being impatient, while participants for whom a timespan longer
than a year is the most important are labeled as being patient. Furthermore, risk
avoidance is included as individuals who prefer to avoid risks tend to have higher
savings in order to be prepared for unexpected circumstances. Risk avoidance is
measured by asking participants to which extent they agree on statements regarding
saving and taking risks such as investing in bonds. After summing up these scores, the
50 percent participants with the lowest score were labeled as being risk averse while
the other half is labeled as being risk loving. Inter vivos transfers lead to a lower bequest
as some of the bequest has already been transferred during life time. Therefore, this
variable is included and participants are divided in a group that considers inter vivos
transfers and a group that doesn’t consider inter vivos transfers. Health is added to the
estimation and participants with a fair to excellent health are categorized as being in
good health, while the rest is categorized being in bad health. Moreover, life expectancy
is added as a variable as proposed by Yaari (1965) by asking participants to express the
probability of reaching a certain age. Here, life expectancy is defined as the probability a
participant lives 11 to 15 more years (only for participants between the age of 55 and 64
the probability of living 11 to 20 years longer is taken). Socio-economic variables enter
the equation to investigate whether these variables influence the relation between the
bequest motive and savings. We included dummy variables for age, gender and
education level. Whether a participant has a child or lives together with a partner is also
included using dummy variables. Lastly, household income instead of personal income is
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included in the model. Participant with a household income below 22 thousand euro
have a low income, between 22 and 40 thousand household income is average, while
above 40 thousand euro household income is considered high.
4. Model
4.1 Bequest motive and socio-economic factors
The aim of the first model is to identify which socio-economic factors influence whether
a bequest motive is present. Therefore, we estimate the following model
𝐵𝑒𝑞𝑢𝑒𝑠𝑡𝑖 = 𝛼1 + 𝛽1 𝑠𝑎𝑣𝑖𝑛𝑔𝑠𝑖 + 𝛽2 𝑝𝑟𝑒𝑐𝑎𝑢𝑡𝑖𝑜𝑛𝑎𝑟𝑦 𝑠𝑎𝑣𝑖𝑛𝑔𝑠𝑖 + 𝛽3 𝑐ℎ𝑖𝑙𝑑𝑟𝑒𝑛𝑖
+ 𝛽4 ℎ𝑜𝑢𝑠𝑒ℎ𝑜𝑙𝑑 𝑖𝑛𝑐𝑜𝑚𝑒𝑖 + 𝛽5 𝑝𝑎𝑟𝑡𝑛𝑒𝑟𝑖 + 𝛽6 𝑎𝑔𝑒𝑖 + 𝛽7 𝑔𝑒𝑛𝑑𝑒𝑟𝑖
+ 𝛽8 𝑒𝑑𝑢𝑐𝑎𝑡𝑖𝑜𝑛𝑖 + 𝛽9 𝑟𝑖𝑠𝑘 𝑎𝑣𝑜𝑖𝑑𝑎𝑛𝑐𝑒𝑖 + 𝛽10 𝑡𝑖𝑚𝑒 𝑝𝑟𝑒𝑓𝑒𝑟𝑒𝑐𝑒𝑖
+ 𝛽11 𝑖𝑛𝑡𝑒𝑟 𝑣𝑖𝑣𝑜𝑠𝑖 + 𝛽12 ℎ𝑒𝑎𝑙𝑡ℎ𝑖 +𝛽13 𝑙𝑖𝑓𝑒 𝑒𝑥𝑝𝑒𝑐𝑡𝑎𝑛𝑐𝑦𝑖 + 𝑒𝑖
where the strength of the bequest motive is our dependent variable and savings is added
as an explanatory variable. The model is estimated twice using the two different
measurements for the bequest motive. First, the importance measurement for bequest is
used and second we use the cash prize measurement for bequest to estimate our model.
We expect that especially participants with children or a partner have a stronger
bequest motive. They are expected to care more about the wellbeing of their relatives
than participants that do not have a person as close to them as a partner or child usually
stands.
4.2 Bequest motive and savings
Our second model is used to determine whether the presence of a bequest motive in
households leads to a higher savings rate. For the analysis, the following econometric
model is estimated:
𝑌𝑖 = 𝛼1 + 𝛽1 𝑏𝑒𝑞𝑢𝑒𝑠𝑡𝑖 + 𝛽2 𝑝𝑟𝑒𝑐𝑎𝑢𝑡𝑖𝑜𝑛𝑎𝑟𝑦 𝑠𝑎𝑣𝑖𝑛𝑔𝑠𝑖 + 𝛽3 𝑐ℎ𝑖𝑙𝑑𝑟𝑒𝑛𝑖
+ 𝛽4 ℎ𝑜𝑢𝑠𝑒ℎ𝑜𝑙𝑑 𝑖𝑛𝑐𝑜𝑚𝑒𝑖 + 𝛽5 𝑝𝑎𝑟𝑡𝑛𝑒𝑟𝑖 + 𝛽6 𝑎𝑔𝑒𝑖 + 𝛽7 𝑔𝑒𝑛𝑑𝑒𝑟𝑖
+ 𝛽8 𝑒𝑑𝑢𝑐𝑎𝑡𝑖𝑜𝑛𝑖 + 𝛽9 𝑟𝑖𝑠𝑘 𝑎𝑣𝑜𝑖𝑑𝑎𝑛𝑐𝑒𝑖 + 𝛽10 𝑡𝑖𝑚𝑒 𝑝𝑟𝑒𝑓𝑒𝑟𝑒𝑐𝑒𝑖
+ 𝛽11 𝑖𝑛𝑡𝑒𝑟 𝑣𝑖𝑣𝑜𝑠𝑖 + 𝛽12 ℎ𝑒𝑎𝑙𝑡ℎ𝑖 +𝛽13 𝑙𝑖𝑓𝑒 𝑒𝑥𝑝𝑒𝑐𝑡𝑎𝑛𝑐𝑦𝑖 + 𝑒𝑖
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where Y is savings for person i and bequest is the strength of the bequest motive for
person i. First, participants are divided in a group that has saved during the last 12
months and a group that did not save during the last 12 months. Therefore, we will use a
model with the following specification:
𝑌𝑖 = 1 𝑖𝑓 𝑠𝑎𝑣𝑖𝑛𝑔𝑠 > 0
𝑌𝑖 = 0 𝑖𝑓 𝑠𝑎𝑣𝑖𝑛𝑔𝑠 ≤ 0
This allows us to first analyze whether the presence of a bequest motive influences
savings, regardless of how much is saved. Second, we will continue with the group that
has saved over the last 12 months and redefine 𝑌𝑖 as the number of euro that the
participant has saved. This allows us to test the significance of the relation between the
bequest motive and savings.
The model is estimated twice, using both the importance measurement for
bequest and the cash prize measurement for bequest. The implications of the analysis
with the cash prize measurement are different than from the first analysis. A person that
puts most of the cash prize in the bequest box automatically puts little in the long-term
care box and vice versa. Therefore, this estimation measures whether an additional euro
in the bequest box leads to higher savings than an additional euro in the long-term care
box. If this is the case, the presence of a bequest motive has a stronger effect on savings
than the presence of a precautionary motive when both motives are equally strong. We
expect that the bequest motive has a positive effect on savings, as well as precautionary
savings. Significance for household income, risk avoidance and time preference is also
expected.
5. Results
In this section our results are reviewed. The aim of the first part is to get insight in the
savings behavior and the different reasons to bequeath within our sample. The second
part discusses the results of our analyses.
13
5.1 Descriptive statistics
5.1.1 Saving motives
We start with reviewing the importance of different types of saving motives. Browning &
Lusardi (1996) grouped saving motives into the following nine different categories:
1. To build up a reserve against unforeseen contingencies out of precaution
2. To smoothen income over life
3. To earn money through interest and dividends
4. To be financially independent
5. To set up an own business
6. To leave a bequest
7. To engage in inter vivos transfers
8. To buy durable goods
9. To improve your future economic situation
Respondents had to rate different saving motives on a seven-point scale, one being very
unimportant and seven being very important. Some motives were asked for multiple
times in a slightly different way. In this case, the mean of all questions concerning this
motive is reported.
Table 2 illustrates that within our sample precaution is the most important
reason for respondents to save. This indicates that individuals attach great value to
being prepared for unforeseen financial circumstances. Smoothening income and being
financially independent are as well among the most important reasons to save. To set up
a business, earn money through interest and dividends and leaving bequests are the
least important motives to save according to this study, which indicates that individuals
take bequests into account only a little while making saving decisions. Using a difference
in means test, the precautionary motive seems to be more important than the bequest
motive with a p-value smaller than 0.001.
Now we take a closer look at the cash prize measurement of bequest, where
participants were asked to divide 250 thousand euro over a bequest box and a long-term
care box.
14
25
20
15
Percentage
10
5
0
0
50
100
150
200
250
Amount of €250k put in the bequest box
Figure 1: tradeoff between long-term care and bequest with the immediate prize
question
Figure 1 shows how much money individuals have put in the bequest box. Most
participants prefer to put more money in the long-term care box than in the bequest box.
About 13 percent of the participants did not put any money into the bequest box, while 8
percent did the opposite. However, on average participants still put 43 percent of the
250.000 euro in the bequest box. This shows that if individuals are forced to choose
between long-term care and leaving a bequest, the bequest motive turns out to be more
important than participants indicated in the first place. Indeed, the correlation
coefficient between the two measurements of bequests indicates there is only a weak
positive relation (R=0.22). Apparently, participants make different choices when they
are asked to distinguish between both motives, which endorses the finding of Dynan et
al. (2002) that saving motives cannot be disentangled. Furthermore, we find that
participants with a child put larger amounts of cash in the bequest box than childless
participants using a difference in means test (p<0.001, see table 3). This effect seems
reasonable as individuals are very much concerned about the wellbeing of their
children, which makes leaving them a bequest more likely. No significant differences are
found between single and partnered participants and low and high educated
15
participants (see table 3). Overall, we can conclude that our data hints at the presence of
a bequest motive. Especially when participants are forced to choose between saving out
of precaution and leaving a bequest, strong presence of a bequest motive has been
observed.
5.1.2 Frequency of bequest motives
To give a brief indication on the frequency of each bequest motive, we analyzed a
questionnaire on bequests conducted by CentER and completed by the LISS panel in
January 2016. The sample consists of 713 participants of 55 years and older.
Respondents were asked if they would like to bequeath more to a person who would
take care of the participant or a person who need the money. It was possible to give
multiple answers. The results are presented in table 4 and illustrated in the figure
below:
I would like to bequeath more to…
80%
70%
60%
50%
40%
30%
20%
10%
0%
a child who
takes care
another
person who
takes care
a child who
needs it
another
no conditions
person who
needs its
other
Figure 1: bar graph of preferences in dividing a bequest
About 70 percent answered that they do not want to attach conditions to their bequest.
Such a high share suggests that most individuals leave a bequest out of warm-glow
altruism, because the height of their bequest is determined regardless of an heir’s
income level and helpfulness. A strategic bequest motive is present at 35 percent of the
participants as they would like to leave a higher bequest to a person who takes care of
the participant when he or she is old. Surprisingly, pure altruism does not play a large
16
role when dividing the bequest as the share of participants that would leave a higher
bequest to a person who needs it is only 16 percent.
5.1.3 Saving behavior
Table 5 provides descriptive statistics on the saving behavior of our sample over the
past 12 months. About 64 percent of our sample has saved over the 12 past months and
on average 6014 euro has been saved. Participants of 75 years and older seem to have
saved only 4568 euro. Using a difference in means test we find a p value of 0.16, which
means that the hypothesis that participants of 75 years and older save as much as
younger participants cannot be rejected. For single participants, another pattern is
observed. Here, the participants between the age of 55 and 64 seem to save less than the
other participants. A difference in means test does not show significance (p=0.11). The
relative low amount of savings of this group of participants may be explained by the fact
that this group is represented by a sample of only 19 participants. Therefore, this sample
may not be representative for this group. Furthermore, couples seem to save more often
than singles. A difference in means test gives us a p value of 0.02, which indicates that
couples indeed save more than singles. Also, the average amount of savings for couples
is 2925 euro higher than for singles.
5.2 Regression analysis
In this section, the results of the regression analyses are discussed. Both models are
estimated by OLS with robust standard errors. Furthermore, the data is clustered on the
household level.
5.2.1 Bequest motive and socio-economic factors
For our model regarding the bequest motive and socio-economic factors we first used
the importance measurement for bequest. We find an R squared of 0.26, which implies
that the model moderately explains the strength of the bequest motive. Furthermore,
having children positively affects the strength of the bequest motive on a 1 percent
significance level. Participants with children, ceteris paribus, tend to value the bequest
motive 17 percent point more important than participants without children. Also,
participants aged between 65 and 74 seem to value the bequest motive 5 percent point
more important than participants between 55 and 64. However, for participants older
17
than 75 no significant effect on the bequest motive is found. Furthermore, patient
participants have a 6 percent point stronger bequest motive, while being risk averse
seems to decrease the strength of the bequest motive by 5 percent (both significant on
the 5 percent level). Inter vivos transfers lead to a substantial higher bequest motive.
The bequest motive for participants that consider inter vivos transfers, ceteris paribus,
is 24 percent point stronger than for other individuals, significant on the 1 percent level.
If we estimate the model using the cash prize measurement for bequest, we find
similar results. However, we now observe an R squared of 0.06, indicating that the
model poorly explains the strength of the bequest motive. We again find significance for
having children, which leads to a 22 percent point stronger bequest motive. This is
comparable with the 17 percent we found using the first measurement. Being risk
averse again leads to a similar decrease in the strength of the bequest motive of percent
point, although only significant on the 10 percent level. The effect of inter vivos transfers
is even stronger than in our previous model, as participants that consider inter vivos
transfers seem to have a 46 percent point stronger bequest motive. However, only
significance on the 10 percent level is found. We do not find significance for being
patient, contrary to our first model. We also do not find significance for participants
between 65 and 74, although we do find significance on the 5 percent level for
participants aged 75 and older. To conclude, we find in both models that inter vivos
transfers and having children increases the strength of the bequest motive, while being
risk averse leads to a negative effect. Therefore, we can state that these socio-economic
variables affect the strength of the bequest motive.
5.2.2 Bequest motive and savings
Our second model regarding the bequest motive and savings is used to determine
whether the presence of a bequest motive in households leads to a higher savings rate.
We find an insignificant coefficient of 0.03 for the bequest motive, which implies that the
bequest motive is not important for deciding whether to save or not. However,
precautionary savings seem to have a positive effect on the savings decision, significant
on the one percent level. Participants that value saving out of precaution as being
important, ceteris paribus, seem to save 49 percent more often than other individuals.
This large difference implies that the importance of precautionary savings is a crucial
indicator for saving behavior. Household income is another essential and very
18
significant indicator for savings, as expected. Participants with a middle and high income
respectively save 24 percent and 35 percent more often than participants with a low
income. Participants between the age of 65 and 74 seem to save 8 percent more often
than participants in other age groups, although this effect is only significant to the 1
percent level. No significant differences are found for the other socio-economic factors.
We continue with the group that has positive savings and estimate the model
again. In this model, the bequest motive does seem to have a significant effect on
savings. For every percent point increase in the importance of the bequest motive,
participants seem to save 47 euro more, on average. This effect is significant at the 5
percent level. Surprisingly, no significance is found for precautionary savings.
Apparently, precaution only affects whether participants save cash and not how much
cash is saved. A high household income again leads to higher savings as participants
with a high household income on average have 4833 euro more savings. Moreover,
being patient and having a partner seems to positively affect the participants’ amount of
savings, both on the 5 percent significance level. Having a partner seems to increase
savings with 2161 euro, while patient participants have 1905 euro more savings.
Estimating the model including the cash prize measurement for bequest leads to
little to no changes. The new measurement shows no significance. Again, significance is
found for the same variables with the same significance levels and similar coefficients.
Overall, we can conclude that the bequest motive does not play a role in deciding
whether to save or not. But when individuals decide to save, it does have a positive effect
on their savings account.
6. Conclusion
The bequest motive and uncertainty have both been proposed to explain the
discrepancy between the life cycle hypothesis and reality. This paper provides insights
in the relation between the bequest motive and savings. Therefore, two different model
are used. The first model is used to identify which socio-economic factors influence
whether a bequest motive is present. We find that having children positively influences
the presence of a bequest motive. Inter vivos transfers lead to a stronger bequest motive
as well, which is contradictory with the findings of Hurd (1989) who suggests that
parents engage in leaving bequests instead of inter vivos transfers. We argue that
bequests and inter vivos transfers complement each other, as parents who care about
19
the wellbeing of their children in the present most likely care about their wellbeing
when they have passed away as well. Furthermore, being risk averse seems to
negatively impact the strength of the bequest motive. We believe that risk averse
individuals focus more on securing their own future and therefore care less about
leaving a bequest.
The second model is used to identify the relation between the bequest motive and
savings. We found that the bequest motive does not influence whether individuals save.
However, if individuals do save, the bequest motive affects the height of their savings.
The opposite holds for precaution: it affects whether people save, but does not influence
the amount of individuals’ savings. This is in contradiction with Dynan et al. (2002), who
argues that both motives cannot be distinguished. Our results seem reasonable. People
first save out of precaution, because they mostly care about maintaining themselves
during unexpected events. Only when the level of precautionary savings is sufficient,
individuals will make bequest consideration and complement their savings based on the
strength of their bequest motive.
Getting insight in the saving motives of the elderly is useful to politicians as
consumption and saving decisions by households have a fundamental impact on the
development of policies regarding taxation, the distribution of wealth and government
debt. So does Kopczuk & Lupton (2007) argue that the introduction of a tax on small
bequests does not significantly influence individual decision making, while the opposite
holds for a tax on large bequests. Furthermore, estate taxes could be constructed in a
more efficient way when more is known about the saving behavior of the elderly.
Because we found that a strategic bequest motive was present at a quarter of our
sample, a decrease in tax on parental gifts to children might be beneficiary to the
government as these kinds of gifts are implicit payments for the provision of care to the
parents. The finding of Dynan et al. (2002) that the bequest motive and uncertainty are
hard to distinguish implies that a change in a tax focused on bequests might lead to a
different outcome than expected and vice versa. More research is needed to get insight
in individuals saving behavior and future research should focus on how policies
regarding bequest and precautionary savings affect individuals saving behavior.
20
7. References
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Alessie, R., Lusardi, A., & Kapteyn, A. (1995). Saving and wealth holdings of the
elderly. Ricerche Economiche, 49(3), 293-314.
Ameriks, J., Caplin, A., Laufer, S., & Van Nieuwerburgh, S. (2011). The joy of giving or
assisted living? Using strategic surveys to separate public care aversion from bequest
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Banks, J., Blundell, R., & Tanner, S. (1998). Is there a retirement-savings
puzzle?. American Economic Review, 769-788.
Barro, R. J. (1974). Are government bonds net wealth?. Journal of political
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Becker, G. (1974). A theory of social interactions.
Bernheim, B. D., Shleifer, A., & Summers, L. H. (1986). The strategic bequest
motive. Journal of Labor Economics, S151-S182.
Bevan, D. L., & Stiglitz, J. E. (1980). Intergenerational transfers and inequality(No. r0076).
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Browning, M., & Lusardi, A. (1996). Household saving: Micro theories and micro facts.
Journal of Economic literature, 34(4), 1797-1855.
Danziger, S., Van Der Gaag, J., Smolensky, E., & Taussig, M. K. (1982). The life-cycle
hypothesis and the consumption behavior of the elderly. Journal of Post Keynesian
Economics, 5(2), 208-227.
Davies, J. B. (1981). Uncertain lifetime, consumption, and dissaving in retirement. The
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De Nardi, M., French, E., & Jones, J. B. (2015). Savings after retirement: A survey (No.
w21268). National Bureau of Economic Research.
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Dynan, K. E., Skinner, J., & Zeldes, S. P. (2002). The importance of bequests and life-cycle
saving in capital accumulation: A new answer. The American Economic Review, 92(2),
274-278.
Groth, C. (2003). The Barro model: Overlapping generations with a bequest motive.
Advanced Macroeconomics, note 4
Hubbard, R. G., Skinner, J., & Zeldes, S. P. (1994). Expanding the life-cycle model:
Precautionary saving and public policy. The American Economic Review, 84(2), 174-179.
Hurd, M. D. (1989). Mortality risk and bequests. Econometrica: Journal of the econometric
society, 779-813.
Kopczuk, W., & Lupton, J. P. (2007). To leave or not to leave: The distribution of bequest
motives. The Review of Economic Studies, 74(1), 207-235.
Kotlikoff, L. J. (1986). Health expenditures and precautionary savings.
Modigliani, F., & Brumberg, R. (1954). Utility analysis and the consumption function: An
interpretation of cross-section data. Franco Modigliani, 1.
Palumbo, M. G. (1999). Uncertain medical expenses and precautionary saving near the
end of the life cycle. The Review of Economic Studies, 66(2), 395-421.
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Political Economy, 106(2), 423-445.
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22
Table 1: Summary statistics
Income
Education
Children
Age
Gender
Partnered
Health status
Summary statistics DHS panel
Count Percentage
Low
138
23%
Middle
300
50%
High
159
27%
Total
597
100%
Low
373
62%
High
224
38%
Total
597
100%
Yes
569
95%
No
28
5%
Total
597
100%
55-64
241
40%
65-74
248
42%
75+
108
18%
Total
597
100%
Mean
66,84
SD
7,65
Male
364
61%
Female
233
39%
Total
597
100%
Yes
479
80%
No
118
20%
Total
597
100%
Bad
41
7%
Good
556
93%
Total
597
100%
Table 2: Summary statistics on saving motives
Motives to save
Out of precaution
To smoothen income over life
To earn money through interest and dividends
To be financially independent
To set up an own business
To leave a bequest
To engage in inter vivos transfers
To buy durable goods
To improve your future economic situation
23
mean
5.95
5.13
3.10
5.53
1.65
3.41
4.72
3.78
4.52
sd
1.01
1.61
1.90
1.22
1.11
1.91
1.50
1.43
1.63
Table 3: Percentage of cash price devoted to bequest
Percentage of cash prize devoted to bequest
Children
Count
Mean
SD
Yes
569
43,76
27,80
No
28
19,14
18,67
Total
597
42,60
27,92
Difference in means test: P value < 0,001
Partnered
Count
Mean
SD
Yes
479
43,52
28,53
No
118
38,90
25,06
Total
597
42,60
27,92
Difference in means test: P value = 0,11
Education level
Count
Mean
SD
High
224
40,77
30,42
Low
373
43,70
26,28
Total
597
42,60
27,92
Difference in means test: P value = 0,21
Table 4: Reasons to leave more bequest
I would like to bequeath more to…
a child who takes care
another person who takes care
a child who needs it
another person who needs its
no conditions
other
total
24
Count
171
76
81
33
497
29
887
Table 5: Saving behavior over the past 12 months
Did your household put any money aside in the past 12 months?
Sample (N=597)
Age
Yes (count)
Mean (in €)
SD (in €)
No (count)
55-64
148
6262
7801
65-74
167
6365
11012
75+
66
4568
7000
Total
381
6014
9238
Couples N=479)
Age
Yes (count)
Mean (in €)
SD (in €)
No (count)
55-64
129
6783
8222
65-74
140
6805
11892
75+
47
4899
8097
Total
316
6513
9995
Singles (N=118)
Age
Yes (count)
Mean (in €)
SD (in €)
No (count)
55-64
19
2724
1047
65-74
27
4083
3411
75+
19
3750
2863
Total
65
3588
2770
25
93
81
42
216
73
62
28
163
20
19
14
53
Model 1: Bequest motive and socio-economic factors
VARIABLES
savings
precautsavings
middleincome
highincome
children
age65_74
age75plus
male
higheducation
partner
patient
riskaverse
intervivos
lifeexpectancy
goodhealth
Constant
bequest
bequestcashprize
0.000716
(0.0233)
-0.00763
(0.0697)
0.0334
(0.0297)
0.0226
(0.0348)
0.173***
(0.0359)
0.0502**
(0.0233)
0.0426
(0.0340)
-0.0139
(0.0190)
-0.00378
(0.0218)
-0.0255
(0.0268)
0.0551**
(0.0215)
-0.0508**
(0.0212)
0.237***
(0.0215)
-0.00672
(0.0546)
0.0240
(0.0435)
0.183**
(0.0814)
-0.00669
(0.0250)
-0.0418
(0.0894)
-0.0100
(0.0285)
-0.0151
(0.0383)
0.220***
(0.0417)
-0.00212
(0.0281)
-0.0766**
(0.0365)
-0.0207
(0.0211)
-0.0214
(0.0272)
0.0352
(0.0295)
0.0146
(0.0241)
-0.0466*
(0.0246)
0.0458*
(0.0246)
-0.0389
(0.0602)
-0.00575
(0.0545)
0.300***
(0.0984)
Observations
597
597
R-squared
0.262
0.063
Robust standard errors in parentheses
*** p<0.01, ** p<0.05, * p<0.1
26
Model 2.1: Bequest motive and savings using importance measure for bequest
VARIABLES
bequest
precautsavings
middleincome
highincome
children
age65_74
age75plus
male
higheducation
partner
patient
riskaverse
intervivos
lifeexpectancy
goodhealth
Constant
positive
savings
amount
savings
0.00269
(0.0876)
0.486***
(0.151)
0.235***
(0.0576)
0.348***
(0.0681)
0.0983
(0.0962)
0.0791*
(0.0445)
0.0537
(0.0662)
-0.00947
(0.0391)
-0.0238
(0.0430)
-0.0251
(0.0539)
0.0106
(0.0411)
0.0490
(0.0411)
-0.0163
(0.0473)
0.0841
(0.0988)
0.0940
(0.0817)
-0.255
(0.175)
4.691**
(2.094)
0.334
(2.534)
0.0274
(1.189)
4.833**
(2.255)
1.333
(1.060)
1.142
(1.453)
0.955
(1.710)
-0.349
(1.007)
1.798
(1.272)
2.161**
(0.986)
1.905**
(0.939)
0.0987
(1.004)
-1.191
(1.027)
3.037
(2.607)
-3.230
(3.913)
-1.842
(3.230)
Observations
597
381
R-squared
0.105
0.137
Robust standard errors in parentheses
*** p<0.01, ** p<0.05, * p<0.1
27
Model 2.2: Bequest motive and savings using cash prize measure for bequest
VARIABLES
bequestcashprize
bequest
precautsavings
middleincome
highincome
children
age65_74
age75plus
male
higheducation
partner
patient
riskaverse
intervivos
lifeexpectancy
goodhealth
Constant
positive
savings
amount
savings
-0.0199
(0.0721)
0.00657
(0.0889)
0.486***
(0.152)
0.234***
(0.0577)
0.348***
(0.0682)
0.102
(0.0970)
0.0789*
(0.0445)
0.0520
(0.0664)
-0.00983
(0.0392)
-0.0242
(0.0430)
-0.0243
(0.0542)
0.0106
(0.0411)
0.0482
(0.0414)
-0.0163
(0.0474)
0.0834
(0.0988)
0.0938
(0.0818)
-0.250
(0.177)
-0.746
(2.134)
4.840**
(2.344)
0.248
(2.510)
0.00405
(1.185)
4.803**
(2.205)
1.488
(1.230)
1.142
(1.453)
0.900
(1.674)
-0.383
(1.030)
1.802
(1.265)
2.196**
(1.015)
1.918**
(0.953)
0.0702
(0.980)
-1.186
(1.019)
3.029
(2.602)
-3.239
(3.911)
-1.632
(3.345)
Observations
597
381
R-squared
0.105
0.137
Robust standard errors in parentheses
*** p<0.01, ** p<0.05, * p<0.1
28