Risk Aversion and Savings Behavior

Abstract

This paper investigates the relationship between lifetime savings and risk aversion. First, we take a theoretical approach in a two-period framework with a very general non-parametric model. We show that risk aversion reduces savings in the presence of mortality risk. We then verify the negative impact of risk aversion on savings in a numerical exercise, with a multi-period setting where mortality risk is calibrated on actual demographic life-tables. Finally, we check that this prediction holds based on an econometric analysis, resorting on the US Health and Retirement Study (HRS) longitudinal survey. The result is robust to different specifications for risk aversion and savings, and to the introduction of a number of controls – including income risk.

Keywords: risk aversion, savings, lifecycle models

JEL Classification: D15, G51, J14