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http://ssrn.com/abstract=910809
 
 

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Precautionary Savings and the Importance of Business Owners


Erik Hurst


University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Arthur B. Kennickell


Federal Reserve Board - Department of Research & Statistics

Annamaria Lusardi


The George Washington University School of Business; National Bureau of Economic Research (NBER)

Francisco Miguel Torralba


University of Chicago - Department of Economics

December 2006

CFS Working Paper No. 2006/16

Abstract:     
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

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Date posted: June 23, 2006  

Suggested Citation

Hurst, Erik and Kennickell, Arthur B. and Lusardi, Annamaria and Torralba, Francisco Miguel, Precautionary Savings and the Importance of Business Owners (December 2006). CFS Working Paper No. 2006/16. Available at SSRN: http://ssrn.com/abstract=910809 or http://dx.doi.org/10.2139/ssrn.910809

Contact Information

Erik Hurst
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Arthur B. Kennickell
Federal Reserve Board - Department of Research & Statistics ( email )
20th & C. St., N.W.
Washington, DC 20551
United States
202-452-2247 (Phone)
202-452-5295 (Fax)
Annamaria Lusardi (Contact Author)
The George Washington University School of Business ( email )
School of Business and Public Management
Washington, DC 20052
United States
HOME PAGE: http://business.gwu.edu/faculty/annamaria_lusardi.cfm
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Francisco Miguel Torralba
University of Chicago - Department of Economics ( email )
1126 East 59th Street
Chicago, IL 60637
United States
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