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Chapter 3: Literature Review
Chapter Text
Precautionary savings —defined as additional wealth accumulated to buffer against future uncertainties—has been extensively studied within economic literature (Carroll, 1997; Leland, 1968). While income uncertainty has traditionally been the primary focus, recent literature has expanded to consider health uncertainty as a distinct driver of precautionary behavior. Palumbo (1999) developed a life-cycle model incorporating uncertain health expenses, finding that precautionary motives against health costs lead to systematically higher savings rates throughout the life cycle. This theoretical prediction has been empirically validated by De Nardi et al. (2010), who demonstrated that uncertain medical expenses account for a substantial portion of savings among elderly Americans, particularly at higher income levels. Households rapidly adjust financial strategies after negative health diagnoses (Smith et al., 2001), with perceived severity of health conditions predicting larger shifts toward safer assets than objective medical indicators (Bogan & Fertig, 2022).
The COVID-19 pandemic created a unique natural experiment to examine precautionary savings under both income and health uncertainty. Studies found that savings rates surged during lockdowns beyond what income loss alone could explain (Coibion et al., 2020), with health concerns (e.g., fear of infection) independently predicting conservative financial behaviors. Similarly, Bayer et al. (2023) found that German households increased their desired savings rate by approximately 2.4 percentage points during the pandemic, with the effect strongest among those expressing health concerns. These findings suggest that perceived health risks—not just objective economic conditions—motivate precautionary saving.
Behavioral economists have increasingly recognized how health risk perceptions uniquely shape financial decisions. Building on prospect theory (Kahneman & Tversky, 1979), research reveals that people often weigh health risks differently than other financial risks when making economic choices. Picone et al. (2004) found that individuals with higher subjective probabilities of illness were significantly more likely to purchase health insurance and accumulate precautionary savings, even controlling for objective health status. This suggests perception, rather than reality alone, drives financial protection behaviors. Smith et al. (2001) demonstrated that new health information prompts immediate financial reallocation, with households receiving negative health news increasing emergency savings while reducing long-term investments. This behavioral pattern was particularly pronounced among households with limited insurance coverage.
The application of the Health Belief Model (HBM) to financial decisions represents a promising interdisciplinary approach. Originally developed to explain health prevention behaviors, the HBM suggests that actions are motivated by perceived susceptibility, perceived severity, perceived benefits, perceived barriers, and cues to action (Janz & Becker, 1984; Rosenstock, 1974). O’Neill et al. (2022) recently adapted this framework to financial behaviors, demonstrating that perceived financial vulnerability (analogous to susceptibility) and potential severity of financial consequences significantly predicted engagement in protective financial actions such as emergency savings accumulation. During the COVID-19 pandemic, Cerami et al. (2020) found that perceived health vulnerability strongly influenced financial decisions, with individuals reporting greater COVID-19 concerns showing more conservative financial behaviors, including increased liquid savings and reduced discretionary spending. This relationship persisted after controlling for a ctual infection rates, suggesting the primacy of perception over objective risk in driving financial behavior.
Experiencing financial hardship has been shown to influence subsequent financial behavior through multiple psychological mechanisms, including increased risk awareness, financial trauma, and learned adaptive responses. While traditional economic theory might predict that financial constraints reduce saving capacity, behavioral evidence suggests more complex relationships. Empirical research by Skoufias (2003) on Mexican households facing economic shocks found that experience with financial hardship led to persistent changes in financial strategies, including increased precautionary savings during subsequent periods of stability.
Similarly, Lusardi (1998) demonstrated that previous unemployment episodes significantly predicted higher savings rates even years after employment stabilized, suggesting long- lasting behavioral impacts of hardship experiences. More recent work by Asebedo and Wilmarth (2017) found that financial hardship experiences create psychological “scars” that manifest as more conservative financial behaviors—particularly increased emergency savings—even after controlling for current financial capabilities. During COVID-19 specifically, O’Connor et al.
(2022) found that households experiencing pandemic-related financial hardship subsequently increased their savings rates when financial conditions stabilized, particularly if they attributed their hardship to insufficient preparation rather than external factors.
A growing body of research reveals significant racial and ethnic differences in how families approach saving and respond to financial risks (Clark et al., 2019). These variations likely reflect differential historical experiences with economic institutions, intergenerational wealth transfers, discriminatory policies, and persistent wealth gaps that shape risk perception and financial strategies. Gittleman and Wolff (2004) documented that Black households maintain higher saving rates than White households at comparable income levels, despite significantly lower absolute wealth levels. This pattern has been attributed to greater perceived economic vulnerability and reduced access to wealth-building mechanisms beyond personal savings.
Francis and Weller (2021) demonstrated that Black and Hispanic households maintain higher liquid-to-illiquid asset ratios than White households with similar financial resources, suggesting stronger precautionary motives.
These differential saving patterns appear to be influenced by varying experiences with financial institutions. Blanchflower et al. (2003) documented persistent disparities in credit access across racial groups, with Black and Hispanic loan applicants experiencing higher rejection rates even after controlling for creditworthiness measures. Charron-Chénier and Seamster (2018) found that restricted access to financial products leads to compensatory financial strategies, including greater cash holdings and emergency savings among minority households. The COVID-19 pandemic intensified these patterns. Weller and Roberts (2021) documented greater increases in precautionary savings among Black and Hispanic households during the pandemic, despite these groups experiencing more severe economic impacts. Similarly, Chen et al. (2022) found that racial minorities reported greater financial anxiety during COVID-19 and subsequently engaged in more protective financial behaviors compared to White respondents with similar financial circumstances.
The relationship between government assistance and financial behavior represents another important dimension of household financial decision-making. Theoretical predictions about this relationship are ambiguous—government support could either crowd out private precautionary savings (by reducing perceived need) or complement such savings (by providing financial stability that enables saving). Hubbard et al. (1995) demonstrated that means-tested government programs can discourage asset accumulation among low-income households due to asset limits for program eligibility. However, more recent work by Halpern-Meekin et al. (2015) found that temporary government assistance through tax refunds often serves as a catalyst for precautionary savings among low-income families, creating “financial breathing room” that enables forward-looking financial behaviors. During COVID-19 specifically, Baker et al.
(2020) analyzed banking data to track spending and saving behaviors following government stimulus payments, finding that liquidity-constrained households primarily used funds for immediate consumption while households with greater financial stability significantly increased savings rates. Supporting this interpretation, Chetty et al. (2022) found that enhanced unemployment benefits during the pandemic led to increased savings among recipients, particularly among households that had experienced previous episodes of financial hardship.
Beyond race and ethnicity, numerous demographic characteristics have been empirically linked to precautionary financial behaviors. Age demonstrates a non- linear relationship with precautionary motives—Kennickell and Lusardi (2005) found that precautionary savings peak during middle age, declining somewhat in later years as retirement savings motives become dominant. However, De Nardi et al. (2016) demonstrated that health-related precautionary motives specifically increase with age, particularly past age 70 when medical expense uncertainty grows. Education consistently predicts greater precautionary savings, even controlling for income and wealth. Lusardi (1998) found that college-educated households maintain larger precautionary buffers relative to income than less-educated households. Clark et al. (2019) demonstrated that this education effect operat es partly through financial literacy, with higher education predicting greater understanding of financial risks and appropriate precautionary measures.
Employment stability, marital status, and household composition also shape precautionary motives. Benito (2006) documented substantially higher precautionary savings among the self- employed and those with variable income compared to those with stable employment. Fisher and Montalto (2010) found that single-parent households maintain higher precautionary savings relative to income than married households with children, despite having lower absolute resources, suggesting that the absence of a potential second earner increases perceived financial vulnerability. West and Mottola (2016) demonstrated that single women exhibit particularly strong precautionary motives, maintaining liquid assets approximately 9% higher than comparable single men. Household income and networth demonstrate complex relationships with precautionary behaviors —while higher-income households maintain larger absolute precautionary reserves, Carroll et al. (2003) found that precautionary motives as a percentage of total savings actually decline with wealth, suggesting diminishing marginal utility of precautionary balances.
Based on the empirical literature reviewed above, we propose a conceptual framework that adapts the Health Belief Model to financial behavior during the COVID-19 pandemic (see Figure 1).
Figure 1: Conceptual Model (see the original PDF).
Informed by the Health Belief Model and prior research, we hypothesize that:
H1: Perceived susceptibility —measured by having received a COVID-19 diagnosis —is positively associated with the likelihood of engaging in precautionary savings.
H2: Cues to action—operationalized as receiving government assistance during the COVID-19 pandemic—are positively associated with precautionary savings.
H3: Perceived severity —measured by the experience of financial hardship during COVID-19—is positively associated with precautionary savings.
H4: Financial knowledge moderates the relationship between perceived severity and precautionary savings, such that the positive association is stronger for individuals with higher financial knowledge.
The findings aim to contribute to understanding household financial resilience during crises and offer insights for financial professionals, policymakers, and business strategists