3.1 Theoretical literature
The theoretical literature presented examines how households decide on saving part of their income. The study is underpinned largely by the permanent income hypothesis. The major implication of the Permanent Income Hypothesis for this study is that, different households are likely to exhibit differences in saving behavior majorly due to differences in transitory income. A study by Ddumba & Obwona, (1998) identified that, self-employed persons are likely to have a higher transitory proportion of their income than salaried workers and thus are likely to have different saving behavior .
First, it is important to trace the theoretical foundations of household saving behavior. Much of the studies on household savings begin with the work of the Keynesian theory of Absolute Income Hypothesis of 1936. Keynes considered savings as the difference between household income and household expenditure. According to Keynes, households tend to increase their consumption as income rises, but not by as much as the increase in income hence what remains is the household savings (Santos Alimi, 2013). This implies a positive linear relationship between household income and household savings. Therefore, \(S=Y-C\), where S is the household savings, Y is the household income and C is the household consumption. Therefore, this theoretical expression simply implies that, the level of household income is likely to influence the level of household saving (Zakaria & Zakaria, 2008).
The Permanent Income Hypothesis (PIH) provides more insights about household saving behavior (Campbell & Mankiw, 1990). The theory assumes that household consumption depends largely on permanent income and thus any transitory income realized by the household is likely to form household savings. According to the theory, a rational household maximizes utility through consumption decisions. Therefore, household whose consumption at time t, Ct, depends on its permanent income Yp, will have consumption (Ct) = aYp. Where Yp is permanent income and a is the marginal propensity to consume. Therefore, household consumption depends largely on the income the household expects to earn in the long run. The household additional consumption out of its permanent income will largely depend on the long run interest rate and stock of wealth. Therefore, the income of a household (Y) is composed of permanent income (Yp) and transitory income (YT). Therefore, variations in household consumption are mostly influenced by transitory income since not all transitory income is actually saved.
Therefore, we could conclude from the permanent income hypothesis that, consumption in a current period is dependent upon the consumption in the previous period and long run average income (permanent income). This assumption can help in predicting the level of household savings. Nonetheless, previous studies that have attempted to study savings behavior using the permanent income hypothesis have taken the form of:
$$S={\beta }_{0}+{\beta }_{1}{Y}_{p}+{\beta }_{2} YT$$
Accordingly, it is that portion of transitory income that creates variations in household saving behavior. The Factors that are likely to create variations in transitory income may include nature of employment (industry type, self-employment, salaried workers), residence, education level of household head among others.
Another important theory about saving behavior is the life-cycle saving hypothesis developed by Brumberg, 1954 and Friedman, (1957). The theory indicates that people will work to accumulate their wealth until retire and will not accumulate more wealth after retirement age. Shorrocks A. F, (1957) extended the model to include income, age, risk and return as saving decision factors.
3.2 Empirical literature
A number of previous empirical studies have attempted to examine the factors influencing household saving behavior with some focusing mainly on developing countries. This section presents empirical literature on the factors that are likely to influence savings behavior of households. A number of previous studies have identified the level of education of the household head as an important determinant of household saving behavior. The level of education is directly linked to household earning potential and increased exposure to financial information. Therefore, education has the ability to influence the saving behavior of households. Most educated households are expected to choose formal saving mechanisms over informal saving mechanisms (Sawuya, 2018). Spring (2009) reported that, households tend to reduce level of savings in the short run as they progress upwards in level of education for Mexico as education expenditures tend to increase with the level of education. This does not mean that with higher education, households tend to choose not saving to informal and formal saving mechanisms. Households are expected to choose informal and formal saving mechanism over not saving in the long run as their earnings rise with higher education attainment.
Sex/Gender of the household head is another important determinant of household saving behavior. Most of the previous studies present female household heads as having more saving supportive behavior compared to male headed households. Such studies include Floro & Seguino, 2008 and (Rehman, Bashir, & Faridi, 2011). The age of the household head is another important factor likely to determine household saving behavior in Uganda. Individuals of working age population tend to save more than those outside the working age population. In particular, the paper by Suppakitjarak & Krishnamra, (2015) identifies that individuals tend to save more during working age and tend to save less as they approach or during retirement age. These findings need to be tested for Uganda majorly due to existence of undeveloped social security mechanisms to support mobilization of savings during retirement age. Only a small proportion of salaried workers are covered by the current social security arrangements.
The employment status of the household head is another important determinant of household saving behavior (Dolphin, 2009). Salaried earners are likely to save more with formal saving mechanisms than self-employed individuals. Individuals that depend largely on subsistence farming are likely not to save. The study by Mpiira et al., (2013) emphasized the role of the type of occupation as a major determinant of saving behavior. The study identifies that stable earning positively influence participation in formal saving mechanisms like SACCOs. Individuals with more stable earnings include salaried workers and those earning rental income. The residence (rural/urban) of the household determines household savings behavior.
The study by Sawuya, (2018) households in urban residences were likely to save more than rural based households. Urban based households are likely to have more access to formal saving mechanisms like commercial banks than rural based households. Therefore, residence is a critical determinant of household saving behavior. Other factors that have been identified through empirical literature include; marital status (Fernández-López, Otero, Vivel, & Rodeiro, 2010) and household size (Abdelkhalek, Arestoff, El, De Freitas, & Mage, 2010). Married couples are likely to be more concerned about their wealth status and they tend to choose to hold a significant proportion of their wealth as savings. They are also more likely to prefer formal saving mechanisms that are likely to secure shared saving instruments. Larger household size tends to erode away household savings due to larger household expenditure.
In summary, a review of theoretical literature shows that, the theoretical foundations of household saving behavior are entrenched in the Permanent Income Hypothesis. Household saving behavior varies majorly due to factors that are likely to affect transitory income of households. Therefore, the microeconomic foundations of household saving behavior have strong theoretical underpinnings. A number of empirical studies have also identified the factors that are likely to determine household saving behavior. Among the factors identified include; employment status of household head, education level, residence, age, marital status, sex/gender of the household head and household size. Therefore, this study seeks to investigate whether these factors significantly determine household saving decisions in Uganda.