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Changes in Risk and the Demand for Saving

34 Pages Posted: 8 Sep 2008  

Louis Eeckhoudt

Facultes Universitaires Catholiques de Mons (FUCAM)

Harris Schlesinger

University of Alabama; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: September 2008

Abstract

How does risk affect saving? Empirical work typically examines the effects of detectible differences in risk within the data. How these differences affect saving in theoretical models depends on the metric one uses for risk. For labor-income risk, second-degree increases in risk require prudence to induce increased saving demand. However, prudence is not necessary for first-degree risk increases and not sufficient for higher-degree risk increases. For increases in interest rate risk, a precautionary effect and a substitution effect need to be compared. This paper provides necessary and sufficient conditions on preferences for an Nth-degree change in risk to increase saving.

Keywords: precautionary saving, prudence, stochastic dominance, temperance

JEL Classification: D81, E21

Suggested Citation

Eeckhoudt, Louis and Schlesinger, Harris, Changes in Risk and the Demand for Saving (September 2008). CESifo Working Paper Series No. 2388. Available at SSRN: https://ssrn.com/abstract=1264948

Louis Eeckhoudt

Facultes Universitaires Catholiques de Mons (FUCAM) ( email )

Chaussee de Binche, 151
Mons 7000
Belgium

Harris Schlesinger (Contact Author)

University of Alabama ( email )

P.O. Box 870244
200 Alston Hall, Box 870224
Tuscaloosa, AL 35487
United States
205-348-7858 (Phone)
205-348-0590 (Fax)

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

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