Risk Aversion and Precautionary Savings in Dynamic Settings

15 Pages Posted: 15 Jul 2016  

Antoine Bommier

ETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich

Francois Le Grand

EMLYON Business School

Date Written: July 14, 2016

Abstract

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

Bommier, Antoine and Le Grand, Francois, Risk Aversion and Precautionary Savings in Dynamic Settings (July 14, 2016). Available at SSRN: https://ssrn.com/abstract=2809553 or http://dx.doi.org/10.2139/ssrn.2809553

Antoine Bommier

ETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich ( email )

Zürichbergstrasse 18
Zurich, 8092
Switzerland

François Le Grand (Contact Author)

EMLYON Business School ( email )

23 Avenue Guy de Collongue
Ecully, 69132
France

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