scholarly journals Income Risk, Precautionary Saving, and Loss Aversion – An Empirical Test

2021 ◽  
Author(s):  
Marcela Ibanez ◽  
Sebastian O. Schneider
Keyword(s):  
Loss Aversion ◽  
Empirical Test ◽  
Precautionary Saving ◽  
Income Risk

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 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.

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.

Life-cycle consumption, precautionary saving, and risk sharing: an integrated analysis using household panel data

2017 ◽  
Vol 17 (2) ◽  
Author(s):  
Seung C. Ahn ◽  
H. Youn Kim ◽  
Tong Hee Kang
Keyword(s):  
Life Cycle ◽  
Panel Data ◽  
Risk Sharing ◽  
Risk Measures ◽  
Alternative Hypothesis ◽  
Integrated Model ◽  
Precautionary Saving ◽  
Integrated Analysis ◽  
Income Risk ◽  
Consumption Behavior

AbstractThis paper presents an integrated model of household consumption behavior and examines its testable implications for various theories of consumption, using panel data on Korean households. The model is framed with an extended Euler equation by incorporating aggregate/idiosyncratic and anticipated/unanticipated income changes with aggregate and idiosyncratic income risk measures. The model can test seven restricted but competing hypotheses such as life-cycle and precautionary saving with and without liquidity constraints, complete risk sharing, and incomplete risk sharing with and without precautionary saving. Each alternative hypothesis is rejected in favor of the integrated model to explain households’ consumption behavior in the panel.

scholarly journals A Theory of the Consumption Function, With and Without Liquidity Constraints

2001 ◽  
Vol 15 (3) ◽  
pp. 23-45 ◽  
Author(s):  
Christopher D Carroll
Keyword(s):  
Liquidity Constraints ◽  
Original Description ◽  
Precautionary Saving ◽  
Income Risk ◽  
Labor Income Risk ◽  
Marginal Propensity To Consume ◽  
Precautionary Behavior ◽  
Marginal Propensity ◽  
Future Income ◽  
Relationship Of

This paper argues that the modern stochastic consumption model, in which impatient consumers face uninsurable labor income risk, matches Milton Friedman's (1957) original description of the Permanent Income Hypothesis much better than the perfect foresight or certainty equivalent models did. The model can explain the high marginal propensity to consume, the high discount rate on future income, and the important role for precautionary behavior that were all part of Friedman's original framework. The paper also explains the relationship of these questions to the Euler equation literature, and argues that the effects of precautionary saving and liquidity constraints are often virtually indistinguishable.

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