On Multivariate Prudence

34 Pages Posted: 21 Oct 2011

See all articles by Elyes Jouini

Elyes Jouini

Univ. Paris Dauphine - CEREMADE

Clotilde Napp

CNRS and Université Paris-Dauphine ; IZA

Diego Nocetti

Clarkson University

Date Written: July 19, 2011

Abstract

In this paper we extend the theory of precautionary saving to the case in which uncertainty is multidimensional and we develop a matrix-measure of multivariate prudence. Furthermore, we characterize comparative prudence, decreasing and increasing prudence, the effect of uncertainty on the marginal propensity to consume out of wealth, and the Drèze-Modigliani substitution effect in this multivariate setting. We also characterize the concept of multivariate downside risk aversion as a multivariate preference for harm disaggregation. We show that our definition is equivalent to a positive precautionary saving motive. We propose an alternative measure of the intensity of downside risk aversion and show that this measure is useful in understanding several economic problems that involve multivariate preferences.

Keywords: matrix-measure, multivariate prudence, comparative prudence, multivariate downside risk aversion, downside risk aversion, multivariate preferences

JEL Classification: C6, D1

Suggested Citation

Jouini, Elyes and Napp, Clotilde and Nocetti, Diego, On Multivariate Prudence (July 19, 2011). Available at SSRN: https://ssrn.com/abstract=1946505 or http://dx.doi.org/10.2139/ssrn.1946505

Elyes Jouini (Contact Author)

Univ. Paris Dauphine - CEREMADE ( email )

Place du Marechal de Lattre de Tassigny
Paris Cedex 16, 75775
France
+ 33 1 44 05 46 75 (Phone)
+ 33 1 44 05 45 99 (Fax)

Clotilde Napp

CNRS and Université Paris-Dauphine ( email )

Place de Lattre de Tassigny
Paris, 75775
France

IZA ( email )

Diego Nocetti

Clarkson University ( email )

Potsdam, NY 13699-5780
United States

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