Precautionary Savings and Self-Selection - Evidence from the German Reunification 'Experiment'

56 Pages Posted: 19 Apr 2005

See all articles by Nicola Fuchs-Schündeln

Nicola Fuchs-Schündeln

Goethe University Frankfurt

Matthias Schundeln

Goethe University Frankfurt

Date Written: April 2005

Abstract

We combine particular features of the German civil service with the unique event of German reunification to test the theory of precautionary savings and to quantify the importance of self-selection into occupations due to differences in risk aversion. In the presence of self-selection, failing to control for risk aversion in empirical tests of precautionary savings results in a bias that could lead to a false rejection of the theory. We exploit the fact that for individuals from the former German Democratic Republic (GDR) German reunification in 1990 caused an exogenous reassignment of income risks. Our findings suggest that self-selection of risk averse individuals into low-risk occupations is economically important and decreases aggregate precautionary wealth holdings significantly.

JEL Classification: D91, E21, J24

Suggested Citation

Fuchs-Schündeln, Nicola and Schundeln, Matthias, Precautionary Savings and Self-Selection - Evidence from the German Reunification 'Experiment' (April 2005). Available at SSRN: https://ssrn.com/abstract=707137 or http://dx.doi.org/10.2139/ssrn.707137

Nicola Fuchs-Schündeln

Goethe University Frankfurt ( email )

Grueneburgplatz 1
Frankfurt am Main, 60323
Germany

Matthias Schundeln (Contact Author)

Goethe University Frankfurt ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

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