How Important is Precautionary Saving?

57 Pages Posted: 6 Sep 2000 Last revised: 22 Sep 2010

See all articles by Christopher D. Carroll

Christopher D. Carroll

Johns Hopkins University - Department of Economics; National Bureau of Economic Research (NBER)

Andrew A. Samwick

Dartmouth College - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: July 1995

Abstract

We estimate the fraction of the wealth of a sample of PSID respondents that is held because some households face greater income uncertainty than others. We first derive an equation characterizing the theoretical relationship between wealth and uncertainty in a buffer-stock model of saving. Next, we estimate that equation using PSID data; we find strong evidence that households engage in precautionary saving. Finally, we simulate the wealth distribution that would prevail if all households had the same uncertainty as the lowest-uncertainty group. We find that between 39 and 46 percent of wealth in our sample is attributable to uncertainty differentials across groups.

Suggested Citation

Carroll, Christopher D. and Samwick, Andrew A., How Important is Precautionary Saving? (July 1995). NBER Working Paper No. w5194, Available at SSRN: https://ssrn.com/abstract=225257

Christopher D. Carroll (Contact Author)

Johns Hopkins University - Department of Economics ( email )

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Andrew A. Samwick

Dartmouth College - Department of Economics ( email )

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United States
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603-646-2122 (Fax)

HOME PAGE: http://www.dartmouth.edu/~samwick

National Bureau of Economic Research (NBER)

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United States

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