Revisiting Precautionary Saving Under Ambiguity
10 Pages Posted: 26 Jun 2018
Date Written: June 11, 2018
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
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