Theoretical there is an income effect. When households have

Theoretical Model:

When comprehensive health insurance is introduced, the
households face two savings decisions or this could affect the households
saving decision in two ways:

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i)Substitution effect or Precautionary motive and

ii)Income effect

When a comprehensive health insurance is introduced in an
economy, households face less uncertainty about their future medical expenses.
So, they can reduce their precautionary saving or specifically, the portion of
the precautionary saving that they thought would need to be spent on future
health issues. But, also there is an income effect. When households have health
insurance, they have more to spend compared to the case when they didn’t have
insurance. And, also, they would have to spend less in case of any medical
emergency. So, their income would also increase and they would have more
disposable income to spend.

In the end, the result will depend on the overall strength
of the two effects. If the substitution effect is strong, they will increase
savings after the introduction of comprehensive insurance and decrease savings
if the income effect is stronger.

Behavioral effect:

The actual social insurance is usually followed by the
expectation of such. A government will announce a policy that will result in
the introduction of social insurance policy, starting from a specified date in
the future.

At the point of the announcement there is likely to be a
behavioral effect on the part of individuals who will be affected by this
change.

Empirical estimate:

The asset accumulation equation is:

At+1
= At + Yt + trt ? Mt ? Ct
………………(1)

Here, Mt= government expenses

trt= government transfers

Yt=Post tax income

 

The borrowing constraint:

At
+ Yt + trt ? M? Ct  ? 0

 

 

 

Proposition :

Aggregate
housing saving rate:

The aggregate household
saving rate at any time t0, ASratet0 , can be
expressed as:

 

 

As there is no change in aggregate disposable income, we can
write:

 

 

Proposition for the
medium run:

The medium-term effect
of the introduction of social health insurance on the aggregate household
saving rate, is negative when the behavioral effect dominates, and ambiguous
when the combined effect of savings and disposable income dominates. When the savings
and disposable income dominates, the effect on the aggregate household saving
rate depends on the relative magnitudes of the increases in Aggregate savings
“AS” and disposable income, “yit”.

 

So, to observe an
increase in savings, we need to observe a very strong combined effect of
savings and disposable income

 

In the long run:

 

In the long run, it is expected that the behavioral effect
will be spread among the population or among most of the population. So, this
effect will become stronger eventually and the combined effect will most likely
be even smaller compared with the behavioral effect in the long run. So, it is
very likely that in the long run, savings will fall with the introduction of
social health insurance.