How Income Volatility Influences Saving Decisions: Evidence from the Lab

Abstract

Around the world, it is becoming increasingly common for individuals to have volatile incomes, which fluctuate from pay to pay. Previous research offers mixed evidence as to whether this uncertainty about one’s income may increase or decrease saving behaviour. Across four incentivised online experiments (N = 712), we examine the relationship between income volatility and saving behaviour using a novel financial decision making task. In this task, participants receive hypothetical income that is either consistent or that varies to different degrees. We capture participants’ perceptions of how volatile their income is and observe how this influences their decision to spend this income or save it towards an impending emergency. Our results indicate that receiving a more volatile income, as measured by its coefficient of variation (CV), leads to higher savings within our task (£213 more saved per 0.1 increase in CV). However, there appears to be a threshold level of volatility that must be exceeded before participants save differently relative to receiving a stable income.

Keywords: Income volatility, Precautionary saving, Uncertainty, Financial decision making

JEL Classification: D14, G51