The Effects of Corporate Retentions on Personal Savings : Tests of Rival Hypotheses

Increases in corporate retentions do not necessarily increase private savings by an equal amount. They may be exactly compensated by reductions in other personal savings, partly compensated, or not compensated at all. The three hypotheses are examined along with the empirical support they have received. Empirical estimation is undertaken to test the three rival hypotheses by use of U.K time-series data. Three frameworks are adopted ; a Simple Linear model, both Static (SLS) and naive dynamic (SLD) ; a General Distributed Lag (GDL) model, and the Life Cycle Hypothesis in its General Distributed Lag Equivalence (LCHGDLE) form ; a Simple Add-on (SAO) model is derived from three identities and simple behavioural assumption(s). It is shown that ; both the GDL and the LCHGDLE models can be obtained from the SAO model. This highlights the underlying naivete of their nature ; all models can be nested in a general form, obtained by use of any of the GDL, LCHGDLE and SAO models. Support is found for the Add-on hypothesis ; increases in corporate retentions will add-on, on a one-to-one basis, other personal savings. Doubt is cast upon the LCH prediction of perfect substitutability. Some macro-implications are briefly examined.