Precautionary savings and wealth heterogeneity: a reassessment of redistributive and insurance policies.

Summary This thesis is based on the observation that precautionary savings, which result from incomplete insurance markets and a debt constraint, are important (Skinner [1988], Caballero [1991] Kasarosian [1997]). This mechanism is therefore likely to modify the impact of redistribution and insurance policies. Indeed, precautionary saving behavior depends on the size of the idiosyncratic income risk. Social insurance and redistribution programs are designed to reduce idiosyncratic income risk. They are therefore likely to interact with precautionary saving behavior. The project of the thesis is then to integrate the precautionary saving mechanism into the evaluation of insurance and redistribution policies. The analysis is limited to four economic policy instruments: progressive income and inheritance taxes, unemployment insurance and public debt. Progressive income and inheritance taxes as they exist in France reduce wealth inequality in comparable proportions, but affect saving behaviour differently. The progressivity of the income tax reduces the savings of the richest, while the progressivity of the inheritance tax creates savings for the reason of bequests for the poorest. Contrary to Cahuc and Lehmann [2000], we show that a decreasing profile of unemployment benefits is able to reduce the conflict of objectives between efficiency and equity as soon as agents save for the precautionary motive. The degressivity as introduced leads the short-term unemployed to save, which they do not do when the unemployment benefit is constant. He can then draw on these savings to support his consumption when he becomes long-term unemployed. The analysis of Aiyagari and McGrattan [1998] reaffirms the positive role of government debt in the presence of precautionary savings. However, it ignores a non-negligible source of exacerbation of idiosyncratic uninsurable income risk that is aggregate risk. It is shown that in the presence of macroeconomic fluctuations, the optimal level of public debt is much higher. The existence of recessionary periods during which the unemployment rate and its duration increase makes precautionary saving to smooth consumption less effective. In addition, during recessions, the interest rate is lower. Precautionary savings become more expensive and more difficult to build up. As public debt increases the interest rate, it makes it less difficult to build up.