Risk, natural disasters, and household savings in a life cycle model

In this paper, I examine savings behavior in a life cycle model that is extended to include the probability of a future economic loss arising from a natural catastrophe. Bronfenbrenner and Yasuba (1987) [Economic welfare. In: Yamura, K., Yasuba, Y. (Eds.). The Political Economy of Japan, The Domestic Transformation, Vol. I. Stanford University Press, stanford, CA, pp. 93-136.] and Toyama (1987) [Nihonjin no kinben chochiku-kan (The diligence and frugality of the Japanese people). Toyo Keizai Shinposha, Tokyo] suggest that frequency of catastrophes such as earthquakes, volcanic eruptions. landslides. and typhoons has contributed to the Japanese high propensity to save. I use cross-country variation in damages caused by natural disasters to estimate the effects on household saving rates. I find that higher damages from geologic and climatic catastrophes are significantly correlated with household saving rates. (C) 2001 Elsevier Science B.V. All rights reserved.