Revisiting Precautionary Saving Under Ambiguity

Abstract

I study the consumption-saving problem with non-separable utility under ambiguity. Using smooth ambiguity aversion, I show that the introduction of ambiguity and greater ambiguity aversion raise optimal saving. When relative prudence in ambiguity preferences is bounded by 2, also greater ambiguity increases saving. While previous work finds that a convex marginal ambiguity function is not sufficient for precautionary saving (Berger, 2014), I show that it may not even be necessary.

Keywords: ambiguity aversion, non-expected utility, uncertainty, saving, comparative statics

JEL Classification: D15, D81, D91, E21