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
CFS Working Paper No. 2006/16
In this paper, we show the pivotal role business owners play in estimating the importance of the precautionary saving motive. The fact that business owners hold higher-than-average wealth while facing higher income risk than other households leads to a correlation between wealth and labor income risk regardless of whether or not a precautionary motive is important. Using data from the Panel Study of Income Dynamics in the 1980s and the 1990s, we show that within separate samples of 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 these two groups leads to an artificially high estimate of the importance of precautionary savings. 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 labor income.
Number of Pages in PDF File: 35
Keywords: Income Risk, Household Wealth, Entrepreneurship
JEL Classification: D91
Date posted: June 23, 2006
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