Showing papers on "Precautionary savings published in 1993"

Precautionary Savings and the Permanent Income Hypothesis

Abstract: This paper derives the explicit solution of a dynamic stochastic optimal consumption problem for infinitely-lived agents whose preferences exhibit, in the presence of non-diversifiable labour income uncertainty, a constant elasticity of intertemporal substitution and constant absolute risk aversion. The constancy of the elasticity of intertemporal substitution, which implies that marginal utility at zero consumption is infinite, guarantees that the non-negativity constraint on consumption is never binding along the optimal path. The assumption of constant absolute risk aversion allows an explicit computation of human wealth, and provides a simple representation of the precautionary savings motive.

Precautionary Savings- A Panel Study

Abstract: A large body of theoretical literature shows that income uncertainty boosts saving. Although the theory on this issue is well established, empirical work is incomplete. This paper tests for the precautionary motive for saving using panel data. Knowing the extent of the precautionary motive is important for gauging the responsiveness of saving to government programs that reduce income uncertainty. It is also important for tax and transfer policy to determine the strength of the precautionary saving motive relative to other motives, like bequests or saving for retirement. Most empirical studies that address issues related to precautionary saving use either aggregate time-series or cross- sectional data, but neither type of data can capture the effects of individual income uncertainty. I use measures of income uncertainty. I use measures of income uncertainty derived from panel data--the National Longtitudal Survey of Labor Market Experience-- and find evidence of a strong precautionary motive for saving.