The Effect of Time and Ambiguity Preferences on Saving and Insurance

Abstract

In this paper, we study two classical saving-insurance problems for the intertemporal version developed by Hayashi and Miao (2011) of the smooth ambiguity model of Klibanoff et al. (2005). These models put risk, ambiguity and time preferences together in a Kreps-Porteus aggregator, and disentangle the effects among risk, ambiguity and time preferences. We show that the concepts and techniques developed by Topkis (1998) and others can be used to obtain a set of simple and intuitive sufficient conditions such that risk, ambiguity and time preferences together always raise the demand for saving and self-insurance.

Keywords: Precautionary saving; Self-insurance; Self-protection; Smooth ambiguity aversion; Intertemporal substitution; Risk aversion

JEL Classification: D81, D91, E21, G11, D61