Demographic Transition and Household Savings in Taiwan∗

The main objective of this paper is to study how Taiwan’s changing survival rates affect households ’ decisions on savings. We employ Ehrlich and Lui’s (1991) dynamic model for the joint decisions of household savings, fertility, and education investments on children as the basis for theoretical analysis. This model allows us to consider the effects of prolonged life expectancy and higher children’s survival rates on household decisions. To empirically examine the dynamics of the household saving decisions, we compile twenty years ’ cross-sectional observations to construct pseudo panel data. It is the use of panel data that permits us to separate the (cohort) effects of changing life expectancy and children’s survival rates from the age effect and the cyclical effect. The empirical results support the theoretical predictions that prolonged life expectancy helps raise the savings rate while higher children’s survival rates reduce it. ∗We are grateful for David Bloom, Ronald Lee, Andy Mason and especially Angus Deaton for their valuable suggestions.