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Precautionary saving: A taxonomy of prudence

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  • Vergara, Marcos

Abstract

We extend Gunning (2010) by analyzing the effect of risk on saving. We derive a general prudence index that determines the threshold for the future risk that makes saving increase. We relate our results to the utility premium of Friedman–Savage.

Suggested Citation

  • Vergara, Marcos, 2017. "Precautionary saving: A taxonomy of prudence," Economics Letters, Elsevier, vol. 150(C), pages 18-20.
    • Handle: RePEc:eee:ecolet:v:150:y:2017:i:c:p:18-20
    DOI: 10.1016/j.econlet.2016.10.029
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    References listed on IDEAS

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    1. Kimball, Miles S, 1990. "Precautionary Saving in the Small and in the Large," Econometrica, Econometric Society, vol. 58(1), pages 53-73, January.
    2. Eeckhoudt, Louis & Schlesinger, Harris, 2009. "On the utility premium of Friedman and Savage," Economics Letters, Elsevier, vol. 105(1), pages 46-48, October.
    3. Gunning, Jan Willem, 2010. "Risk and savings: A taxonomy," Economics Letters, Elsevier, vol. 107(1), pages 39-41, April.
    4. 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.
    5. Menezes, C F & Hanson, D L, 1970. "On the Theory of Risk Aversion," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 11(3), pages 481-487, October.
    6. Diamond, Peter A. & Stiglitz, Joseph E., 1974. "Increases in risk and in risk aversion," Journal of Economic Theory, Elsevier, vol. 8(3), pages 337-360, July.
    7. Eeckhoudt, Louis & Schlesinger, Harris, 2008. "Changes in risk and the demand for saving," Journal of Monetary Economics, Elsevier, vol. 55(7), pages 1329-1336, October.
    8. Zeckhauser, Richard & Keeler, Emmett, 1970. "Another Type of Risk Aversion," Econometrica, Econometric Society, vol. 38(5), pages 661-665, September.
    9. Choi, Gyemyung & Kim, Iltae & Snow, Arthur, 2001. "Comparative Statics Predictions for Changes in Uncertainty in the Portfolio and Savings Problems," Bulletin of Economic Research, Wiley Blackwell, vol. 53(1), pages 61-72, January.
    10. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
    11. A. Sandmo, 1970. "The Effect of Uncertainty on Saving Decisions," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 37(3), pages 353-360.
    12. Milton Friedman & L. J. Savage, 1948. "The Utility Analysis of Choices Involving Risk," Journal of Political Economy, University of Chicago Press, vol. 56(4), pages 279-279.
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    Citations

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    Cited by:

    1. Mensah, Edouard R. & Filipski, Mateusz J., 2022. "Saving for a rainy day: the impact of natural disasters on savings rates," 2022 Annual Meeting, July 31-August 2, Anaheim, California 322266, Agricultural and Applied Economics Association.
    2. Donatella Baiardi & Marco Magnani & Mario Menegatti, 2020. "The theory of precautionary saving: an overview of recent developments," Review of Economics of the Household, Springer, vol. 18(2), pages 513-542, June.
    3. Vergara, Marcos & Bonilla, Claudio A., 2021. "Precautionary saving in mean-variance models and different sources of risk," Economic Modelling, Elsevier, vol. 98(C), pages 280-289.
    4. Claudio Bonilla & Marcos Vergara, 2022. "New results on precautionary saving and nonlinear risks," Journal of Economics, Springer, vol. 136(2), pages 177-189, July.
    5. Pablo Gutiérrez Cubillos & Roberto Pastén, 2023. "Nonlinear risks: a unified framework," Theory and Decision, Springer, vol. 95(1), pages 11-32, July.
    6. Ethan Hunt & Dr. Hyungjoon Jeon & Dr. Sang Lee, 2021. "Determinants of Household Savings: An Empirical Evidence from the OECD Member Countries," Business and Economic Research, Macrothink Institute, vol. 11(2), pages 62-75, June.

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    More about this item

    Keywords

    Precautionary saving; General prudence index; Utility premium;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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