Safety First Consumption

Abstract:     
This paper develops a model of safety first consumption behavior in which the likelihood of survival to the next period depends on current consumption levels. Below a threshold asset level, individuals follow a decumulation path, and above that level they follow an accumulation path. Saving rates then vary discontinuously with asset level, generating a poverty trap and divergence in incomes. Reduction of risk raises saving rates. A more equitable distribution of assets can be consistent with greater aggregate savings and growth because of declining marginal propensity to save over some asset intervals.

Number of Pages in PDF File: 27

Keywords: Poverty trap, growth, discontinuities, saving

JEL Classification: E21, O12, O16

working papers series