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A note on the relevance of prudence in precautionary saving

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  • Luigi Ventura

    (Department of Economics, University of Rome "La Sapienza")

Abstract

The aim of this note is to suggest that prudence, i.e. convexity of marginal utility, can only explain a small share of precautionary savings, which we may define as savings generated by variance in income. Therefore, if we are willing to admit that precautionary savings constitute a sizable share of total savings, other factors should be called for. We present a few examples showing that risk aversion might constitute one such factor.

Suggested Citation

  • Luigi Ventura, 2007. "A note on the relevance of prudence in precautionary saving," Economics Bulletin, AccessEcon, vol. 4(23), pages 1-11.
    • Handle: RePEc:ebl:ecbull:eb-07d80007
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    References listed on IDEAS

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    1. Kuehlwein, Michael, 1991. "A test for the presence of precautionary saving," Economics Letters, Elsevier, vol. 37(4), pages 471-475, December.
    2. Hayne E. Leland, 1968. "Saving and Uncertainty: The Precautionary Demand for Saving," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 82(3), pages 465-473.
    3. Adam J. Grossberg, 1991. "Personal Saving under Income Uncertainty: A Test of the Intertemporal Substitution Hypothesis," Eastern Economic Journal, Eastern Economic Association, vol. 17(2), pages 203-210, Apr-Jun.
    4. Christopher D. Carroll & Andrew A. Samwick, 1998. "How Important Is Precautionary Saving?," The Review of Economics and Statistics, MIT Press, vol. 80(3), pages 410-419, August.
    5. Irvine, Ian & Wang, Susheng, 2001. "Saving behavior and wealth accumulation in a pure lifecycle model with income uncertainty," European Economic Review, Elsevier, vol. 45(2), pages 233-258, February.
    6. Stefan Hochguertel, 2003. "Precautionary motives and portfolio decisions," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 18(1), pages 61-77.
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    Cited by:

    1. Ventura, Luigi, 2008. "Risk sharing opportunities and macroeconomic factors in Latin American and Caribbean countries : A consumption insurance assessment," Policy Research Working Paper Series 4490, The World Bank.
    2. Carol Newman & Fiona Wainwright, 2011. "Income Shocks and Household Risk-Coping Strategies: Evidence from Rural Vietnam," The Institute for International Integration Studies Discussion Paper Series iiisdp358, IIIS.
    3. Christian Josef Bauer & Wolfgang Buchholz, 2008. "How Changing Prudence and Risk Aversion Affect Optimal Saving," CESifo Working Paper Series 2438, CESifo.

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    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • G0 - Financial Economics - - General

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