Precautionary Savings and the Importance of Business Owners
University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)
Arthur B. Kennickell
Federal Reserve Board - Department of Research & Statistics
The George Washington University School of Business; National Bureau of Economic Research (NBER)
Francisco Miguel Torralba
University of Chicago - Department of Economics
NBER Working Paper No. w11731
In this paper, we show the pivotal role business owners play in estimating the importance of the precautionary saving motive. Since business owners hold larger amounts of wealth than other households for non-precautionary reasons and also face highly volatile income, they induce a correlation between wealth and income risk regardless of whether or not a precautionary saving motive exists. Using data from the Panel Study of Income Dynamics in the 1980s and the 1990s, we show that among both business owners and non-business owners, the size of precautionary savings with respect to labor income risk is modest and accounts for less than ten percent of total household wealth. However, pooling together the two groups leads to an artificially high estimate of the importance of precautionary savings. New data from the Survey of Consumer Finances further confirms that precautionary savings account for less than ten percent of total wealth for both business owners and non-business owners. Thus, while a precautionary saving motive exists and affects all households, it does not give rise to high amounts of wealth in the economy, particularly among those households who face the most volatile stream of income.
Number of Pages in PDF File: 55working papers series
Date posted: January 25, 2006
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