IDEAS home Printed from https://ideas.repec.org/a/kap/jeczfn/v143y2024i1d10.1007_s00712-024-00865-y.html
   My bibliography  Save this article

Even imprudent risk lovers may engage in precautionary saving

Author

Listed:
  • Marco M. Sorge

    (University of Salerno, University of Göttingen and CSEF)

Abstract

Recent developments in dynamic consumption theory have shown that risk-loving agents, much like their risk-averse analogues, can exhibit downside risk aversion (prudence) and thus demand precautionary savings. I complement this finding by showing that risk-seeking preferences also magnify the role of natural borrowing limits in shaping consumers’ behavior, causing risk lovers to increase savings against income uncertainty in cases where risk averters would not: even imprudent risk lovers may engage in precautionary saving.

Suggested Citation

  • Marco M. Sorge, 2024. "Even imprudent risk lovers may engage in precautionary saving," Journal of Economics, Springer, vol. 143(1), pages 101-109, September.
    • Handle: RePEc:kap:jeczfn:v:143:y:2024:i:1:d:10.1007_s00712-024-00865-y
    DOI: 10.1007/s00712-024-00865-y
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s00712-024-00865-y
    File Function: Abstract
    Download Restriction: no
    File URL: https://libkey.io/10.1007/s00712-024-00865-y?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Christopher D. Carroll, 1997. "Buffer-Stock Saving and the Life Cycle/Permanent Income Hypothesis," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(1), pages 1-55.
    2. Donatella Baiardi & Marco Magnani & Mario Menegatti, 2014. "Precautionary saving under many risks," Journal of Economics, Springer, vol. 113(3), pages 211-228, November.
    3. Kimball, Miles S, 1990. "Precautionary Saving in the Small and in the Large," Econometrica, Econometric Society, vol. 58(1), pages 53-73, January.
    4. Mario Menegatti, 2009. "Optimal saving in the presence of two risks," Journal of Economics, Springer, vol. 96(3), pages 277-288, April.
    5. Eeckhoudt, Louis & Schlesinger, Harris, 2009. "On the utility premium of Friedman and Savage," Economics Letters, Elsevier, vol. 105(1), pages 46-48, October.
    6. Carroll, Christopher D. & Holm, Martin B. & Kimball, Miles S., 2021. "Liquidity constraints and precautionary saving," Journal of Economic Theory, Elsevier, vol. 195(C).
    7. 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.
    8. Deaton, Angus, 1991. "Saving and Liquidity Constraints," Econometrica, Econometric Society, vol. 59(5), pages 1221-1248, September.
    9. Jingyuan Li, 2012. "Precautionary saving in the presence of labor income and interest rate risks," Journal of Economics, Springer, vol. 106(3), pages 251-266, July.
    10. M. Menegatti, 2007. "A new interpretation for the precautionary saving motive: a note," Journal of Economics, Springer, vol. 92(3), pages 275-280, December.
    11. S. Rao Aiyagari, 1994. "Uninsured Idiosyncratic Risk and Aggregate Saving," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(3), pages 659-684.
    12. 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.
    13. Jappelli, Tullio & Pistaferri, Luigi, 2017. "The Economics of Consumption: Theory and Evidence," OUP Catalogue, Oxford University Press, number 9780199383153.
    14. 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.
    15. 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.
    16. Menegatti, Mario, 2001. "On the Conditions for Precautionary Saving," Journal of Economic Theory, Elsevier, vol. 98(1), pages 189-193, May.
    17. Marco Magnani, 2017. "A new interpretation of the condition for precautionary saving in the presence of an interest-rate risk," Journal of Economics, Springer, vol. 120(1), pages 79-87, January.
    18. Rothschild, Michael & Stiglitz, Joseph E., 1971. "Increasing risk II: Its economic consequences," Journal of Economic Theory, Elsevier, vol. 3(1), pages 66-84, March.
    19. Kit Pong Wong, 2019. "An interpretation of the condition for precautionary saving: the case of greater higher-order interest rate risk," Journal of Economics, Springer, vol. 126(3), pages 275-286, April.
    20. Sebastian Ebert, 2013. "Even (Mixed) Risk Lovers Are Prudent: Comment," American Economic Review, American Economic Association, vol. 103(4), pages 1536-1537, June.
    21. Menegatti, Mario, 2014. "New results on the relationship among risk aversion, prudence and temperance," European Journal of Operational Research, Elsevier, vol. 232(3), pages 613-617.
    22. Claudio Bonilla & Marcos Vergara, 2022. "New results on precautionary saving and nonlinear risks," Journal of Economics, Springer, vol. 136(2), pages 177-189, July.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. 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.
    2. Baiardi, Donatella & De Donno, Marzia & Magnani, Marco & Menegatti, Mario, 2015. "New results on precautionary saving under two risks," Economics Letters, Elsevier, vol. 130(C), pages 17-20.
    3. Claudio Bonilla & Marcos Vergara, 2022. "New results on precautionary saving and nonlinear risks," Journal of Economics, Springer, vol. 136(2), pages 177-189, July.
    4. Marzia Donno & Marco Magnani & Mario Menegatti, 2020. "Changes in multiplicative risks and optimal portfolio choice: new interpretations and results," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 43(1), pages 251-267, June.
    5. Marco Magnani, 2020. "Precautionary retirement and precautionary saving," Journal of Economics, Springer, vol. 129(1), pages 49-77, January.
    6. Donatella Baiardi & Marco Magnani & Mario Menegatti, 2014. "Precautionary saving under many risks," Journal of Economics, Springer, vol. 113(3), pages 211-228, November.
    7. Wulff, Alexander & Heinemann, Maik, 2015. "Idiosyncratic Risk, Borrowing Constraints and Financial Integration - A Discussion of Ambiguous Results," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113165, Verein für Socialpolitik / German Economic Association.
    8. Maik Heinemann & Alexander Wulff, 2015. "Idiosyncratic Risk, Borrowing Constraints and Financial Integration - A Discussion of Ambiguous Results," Working Papers 2015019, Berlin Doctoral Program in Economics and Management Science (BDPEMS).
    9. 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.
    10. James Feigenbaum, 2005. "Heterogeneity vs Uncertainty in Anticipation of a Borrowing Constraint," Working Paper 230, Department of Economics, University of Pittsburgh, revised Jan 2005.
    11. Georgescu, Irina & Kinnunen, Jani, 2020. "The interest rate for saving as a possibilistic risk," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 547(C).
    12. Marco Magnani, 2017. "A new interpretation of the condition for precautionary saving in the presence of an interest-rate risk," Journal of Economics, Springer, vol. 120(1), pages 79-87, January.
    13. Mark Huggett, 2004. "Precautionary Wealth Accumulation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 71(3), pages 769-781.
    14. Emilio Fernandez-Corugedo, 2002. "Soft liquidity constraints and precautionary saving," Bank of England working papers 158, Bank of England.
    15. 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.
    16. Baiardi, Donatella & Manera, Matteo & Menegatti, Mario, 2013. "Consumption and precautionary saving: An empirical analysis under both financial and environmental risks," Economic Modelling, Elsevier, vol. 30(C), pages 157-166.
    17. Donatella Baiardi & Mario Menegatti, 2011. "Pigouvian tax, abatement policies and uncertainty on the environment," Journal of Economics, Springer, vol. 103(3), pages 221-251, July.
    18. Marcela Ibanez & Sebastian O. Schneider, 2023. "Income Risk, Precautionary Saving, and Loss Aversion – An Empirical Test," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2023_06, Max Planck Institute for Research on Collective Goods.
    19. Diego C. Nocetti, 2016. "Robust Comparative Statics of Risk Changes," Management Science, INFORMS, vol. 62(5), pages 1381-1392, May.
    20. James Feigenbaum & Geng Li, 2008. "Lifecycle Dynamics of Income Uncertainty and Consumption," Working Paper 360, Department of Economics, University of Pittsburgh, revised Jul 2008.

    More about this item

    Keywords

    Risk lovers; Precautionary saving; Prudence;
    All these keywords.

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • 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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:jeczfn:v:143:y:2024:i:1:d:10.1007_s00712-024-00865-y. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.