Consumption Uncertainty and Precautionary Saving (original) (raw)
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Consumption Decisions Under Uncertainty: an Extension
1985
In 1972, Dreze and Modigliani Generalized the Line of Research Initiated by Leland [5] and Sandmo [8] on the Effects of Income Risk on Consumption. They Gave Necessary and Sufficient Conditions for Consumption to Decrease Under Income Risk. However, They Did Not Cover Extensively the Case of Capital Risk Without Perfect Markets. in This Note We Provide Necessary and Sufficient Conditions for Signing the Response of Consumption to a Global Increase in Capital Risk.
SSRN Electronic Journal, 2000
Most empirical studies of savings behaviour that take explicit account of uncertainty consider for identication data that describe the evolution of circumstances observed during an appreciable period of the life-course. Here we report results obtained using a dynamic programming model that has been adapted to permit identication of preference parameters based on data observed at a point in time for a given population cross-section. The behavioural margins used to identify key preference parameters are described, and the advantages of the approach are discussed. Our empirical results demonstrate the feasibility of the empirical approach in context of contemporary desktop computing technology.
How Important Is Precautionary Saving?
We estimate how much of the wealth of a sample of PSID respondents is held because some households face more income uncertainty than others. We begin by solving a theoretical model of saving, which we use to develop appropriate measures of uncertainty. We then regress measures of wealth on our measures of uncertainty, and find evidence that households engage in precautionary saving. Finally, we simulate the wealth distribution that our empirical results imply would prevail if all households had the same uncertainty as the lowest-uncertainty group. We find that between 39 and 46 percent of wealth in our sample is attributable to the extra uncertainty that some consumers face compared to the lowest-uncertainty group.
Quantifying the Cost of Risk in Consumption
The B.E. Journal of Theoretical Economics, 2010
Fixing a risky intertemporal, interagent consumption profile, its total cost is the total willingness to pay for smoothing everyone's consumption. It decomposes into a micro cost that captures the inefficiency in the cross-sectional distribution of total consumption, risky as it is, and a macro cost that captures the additional benefit of eliminating the risk in total consumption, once efficiently redistributed.We consider the risk that a household experiences income mobility and the consequent consumption mobility. U.S. panel data estimates a consumption profile for which we compute the costs. The total cost is 9-18% of total initial consumption for CRRA parameters 1.25-3.5. Of this, 80-90% is the micro cost and only 10-20% is the macro cost. The magnitude of these results, and in particular the relative importance of the micro cost, is in line with previous empirical evidence.Motivated by this evidence we develop the theory of micro cost. Moreover, because the micro cost does ...
Journal of Political Economy, 1993
Using data from the Consumer Expenditure Survey, this paper presents a simple test that provides an explicit estimate of the parameter in the utility function that reflects the strength of the precautionary saving motive, the coefficient of relative prudence. The test yields a fairly precise estimate of a small precautionary motive; in fact, the estimate is too small to be consistent with widely accepted beliefs about risk aversion. The presence of liquidity-constrained households does not appear to explain this finding, and there is some evidence that self-selection of households into risky environments also cannot explain the results.
Economic Modelling, 2013
This paper studies the empirical relationship between consumption and saving under two different sources of uncertainty: financial risk and environmental risk. The analysis is carried out using time series data for six advanced economies in the period 1965-2007. The results support the theoretical conclusions that both financial risk alone and the interaction between financial and environmental risks affect consumption. Moreover, we suggest a solution to some shortcomings which concern the empirical analysis performed with oneargument utility functions. Finally, we provide new estimates of indexes of relative risk aversion and relative prudence, and relative preference of environmental quality.