Revisiting Precautionary Saving Under Ambiguity

10 Pages Posted: 26 Jun 2018

Date Written: June 11, 2018

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

Suggested Citation

Peter, Richard, Revisiting Precautionary Saving Under Ambiguity (June 11, 2018). Available at SSRN: https://ssrn.com/abstract=3194062 or http://dx.doi.org/10.2139/ssrn.3194062

Richard Peter (Contact Author)

University of Iowa ( email )

341 Schaeffer Hall
Iowa City, IA 52242-1097
United States

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