Risk Aversion and Precautionary Savings in Dynamic Settings
15 Pages Posted: 15 Jul 2016
Date Written: July 14, 2016
We study how risk aversion affects precautionary savings when considering monotone recursive Kreps-Porteus preferences. In a general infinite-horizon setting, we prove that risk aversion unambiguously increases precautionary savings. The result is derived without specifying income uncertainty, which can follow any kind of stochastically monotone process, and accounting for possibly binding borrowing constraints.
Keywords: risk aversion, precautionary savings, recursive models, monotonicity
JEL Classification: D80, D91, E21
Suggested Citation: Suggested Citation