The Response of Consumption to Income Risk

2017 ◽  
Author(s):  
Tullio Jappelli ◽  
Luigi Pistaferri
Keyword(s):  
Private Information ◽  
Null Hypothesis ◽  
Indirect Evidence ◽  
Precautionary Saving ◽  
Reduced Form ◽  
Research Strategies ◽  
Income Risk ◽  
Distribution Of Wealth ◽  
Market Incompleteness ◽  
Private Savings

Tests of the importance of precautionary saving follow several research strategies. One aims to find a variable (or set of variables) that can approximate the variance of the growth rate of consumption. A second strategy seeks to estimate a reduced form for the level of consumption and wealth with proxies for income risk. A third approach simulates the path of consumption and wealth in models with precautionary saving, matching simulations with the observed distribution of wealth and consumption. Other studies provide indirect evidence for or against the precautionary saving hypothesis. Finally, some papers test the null hypothesis of the precautionary saving model (or more generally, self-insurance), in which risks can only be insured via private savings, against specific alternatives in which researchers make the source of market incompleteness explicit (positing, for instance, that it is due to private information).

The Precautionary Saving Model

2017 ◽  
Author(s):  
Tullio Jappelli ◽  
Luigi Pistaferri
Keyword(s):  
Liquidity Constraints ◽  
Precautionary Saving ◽  
Income Risk ◽  
Quadratic Utility ◽  
Excess Sensitivity

The chapter removes the assumption of quadratic utility and examines situations in which consumers respond to income risk by increasing current saving to protect against future shocks to income. This motive for saving is called precautionary saving, and it provides an explanation for some of the empirical findings in the literature, such as the observation that people with more volatile incomes tend to save more than individuals with more stable income patterns. Moreover, it can also explain the excess sensitivity of consumption to expected income changes. Indeed, a model with precautionary saving produces a good many predictions similar to those of the model with liquidity constraints.

scholarly journals Bidding for Incomplete Contracts: An Empirical Analysis of Adaptation Costs

2014 ◽  
Vol 104 (4) ◽  
pp. 1288-1319 ◽  
Author(s):  
Patrick Bajari ◽  
Stephanie Houghton ◽  
Steven Tadelis
Keyword(s):  
Market Power ◽  
Empirical Model ◽  
Private Information ◽  
Important Determinant ◽  
Incomplete Contracts ◽  
Government Procurement ◽  
Reduced Form ◽  
Contractual Incompleteness ◽  
Procurement Contracts ◽  
Adaptation Costs

Procurement contracts are often renegotiated because of changes that are required after their execution. Using highway paving contracts we show that renegotiation imposes significant adaptation costs. Reduced form regressions suggest that bidders respond strategically to contractual incompleteness and that adaptation costs are an important determinant of their bids. A structural empirical model compares adaptation costs to bidder markups and shows that adaptation costs account for 7.5–14 percent of the winning bid. Markups from private information and market power, the focus of much of the auctions literature, are much smaller by comparison. Implications for government procurement are discussed. (JEL D44, D82, D86, H57, L13, L74, R42)

scholarly journals Consumption Uncertainty and Precautionary Saving

2020 ◽  
Vol 102 (1) ◽  
pp. 148-161 ◽  
Author(s):  
Dimitris Christelis ◽  
Dimitris Georgarakos ◽  
Tullio Jappelli ◽  
Maarten van Rooij
Keyword(s):  
Representative Sample ◽  
Partial Identification ◽  
Precautionary Saving ◽  
Income Risk ◽  
Consumption Growth ◽  
Subjective Expectations ◽  
Identification Methods ◽  
Self Employment ◽  
Future Consumption ◽  
Consumption Risk

Using survey data from a representative sample of Dutch households, we estimate the strength of precautionary saving by eliciting subjective expectations on future consumption. Expected consumption risk is positively correlated with self-employment and income risk and negatively with age. We insert these subjective expectations (rather than consumption realizations, as in the existing literature) in an Euler equation for consumption and estimate the degree of prudence by associating expected consumption risk with expected consumption growth. Robust OLS and IV estimates indicate a coefficient of relative prudence of around 2. We obtain similar results via partial identification methods using weak assumptions.

scholarly journals Dynastic Precautionary Savings

2021 ◽  
Author(s):  
Corina Boar
Keyword(s):  
Panel Study ◽  
Precautionary Saving ◽  
Permanent Income ◽  
Precautionary Savings ◽  
Income Dynamics ◽  
Income Risk ◽  
Income Uncertainty ◽  
Parent Child

Abstract This article documents that parents accumulate savings to insure their children against income risk. I refer to this behaviour as dynastic precautionary saving. Using a sample of matched parent–child pairs from the Panel Study of Income Dynamics, I test for dynastic precautionary savings by examining the response of parental consumption to the child’s permanent income uncertainty. I exploit variation in permanent income risk across age and industry–occupation groups to confirm that, all else equal, higher uncertainty in the child’s permanent income depresses parental consumption, indicating a precautionary saving motive across generations.

Discretionary Disclosures in Response to Intra-Industry Information Transfers

1994 ◽  
Vol 9 (2) ◽  
pp. 265-282 ◽  
Author(s):  
Ashiq Ali ◽  
Joshua Ronen ◽  
Shu-Hsing Li
Keyword(s):  
Private Information ◽  
Stock Price ◽  
Indirect Evidence ◽  
Bad News ◽  
Price Changes ◽  
Earnings Releases ◽  
Information Transfers ◽  
Full Revelation

This study examines information disclosures about non-announcing firms' following the earnings release by another firm in the same industry. It provides indirect evidence (through stock price changes) that the information disclosed about non-announcing firms is significant only when announcing firms convey bad news through their earnings releases and when non-announcing firms are large. This finding provides support to Verrecchia's (1983) theory which predicts that in the presence of disclosure related costs, full revelation of managers' private information (as shown in the Grossman [1981]-Milgrom [1981] world) does not obtain. Instead, managers use discretion in disclosing their private information.

scholarly journals A possibilistic and probabilistic approach to precautionary saving

2017 ◽  
Vol 64 (3) ◽  
pp. 273-295 ◽  
Author(s):  
Irina Georgescu ◽  
Adolfo Cristóbal-Campoamor ◽  
Ana Lucia-Casademunt
Keyword(s):  
Fuzzy Number ◽  
Mixed Models ◽  
Probabilistic Approach ◽  
Random Variable ◽  
Precautionary Saving ◽  
Optimal Choice ◽  
Background Risk ◽  
Precautionary Savings ◽  
Income Risk ◽  
Optimal Saving

This paper proposes two mixed models to study a consumer?s optimal saving in the presence of two types of risk: income risk and background risk. In the first model, income risk is represented by a fuzzy number and background risk by a random variable. In the second model, income risk is represented by a random variable and background risk by a fuzzy number. For each model, three notions of precautionary savings are defined as indicators of the extra saving induced by income and background risk on the consumer?s optimal choice. In conclusion, we can characterize the conditions that allow for extra saving relative to optimal saving under certainty, even when a certain component of risk is modelled using fuzzy numbers.

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