Precautionary Saving in the Small and in the Large.
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In this paper, the Arrow-Pratt theory of risk aversion is applied to the theory of optimal choice under risk, and a measure of the strength of the precautionary saving motive analogous to the ArrowPratt measure of risk avoidance is used to establish a number of new propositions about the necessity of saving and give a new interpretation of the Dreze-Modigliani substitution effect.Abstract:
The theory of precautionary saving is shown to be isomorphic to the Arrow-Pratt theory of risk aversion, making possible the application of a large body of knowledge about risk aversion to precautionary saving--and more generally, to the theory of optimal choice under risk. In particular, a measure of the strength of the precautionary saving motive analogous to the Arrow-Pratt measure of risk aversion is used to establish a number of new propositions about precautionary saving and to give a new interpretation of the Dreze-Modigliani substitution effect. Copyright 1990 by The Econometric Society.read more
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