Precautionary Savings and the Importance of Business Owners

55 Pages Posted: 25 Jan 2006 Last revised: 15 Aug 2014

See all articles by Erik Hurst

Erik Hurst

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Arthur B. Kennickell

Federal Reserve Board - Department of Research & Statistics

Annamaria Lusardi

George Washington University - Department of Accountancy; National Bureau of Economic Research (NBER)

Francisco Miguel Torralba

University of Chicago - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: November 2005

Abstract

In this paper, we show the pivotal role business owners play in estimating the importance of the precautionary saving motive. Since business owners hold larger amounts of wealth than other households for non-precautionary reasons and also face highly volatile income, they induce a correlation between wealth and income risk regardless of whether or not a precautionary saving motive exists. Using data from the Panel Study of Income Dynamics in the 1980s and the 1990s, we show that among both business owners and non-business owners, the size of precautionary savings with respect to labor income risk is modest and accounts for less than ten percent of total household wealth. However, pooling together the two groups leads to an artificially high estimate of the importance of precautionary savings. New data from the Survey of Consumer Finances further confirms that precautionary savings account for less than ten percent of total wealth for both business owners and non-business owners. Thus, while a precautionary saving motive exists and affects all households, it does not give rise to high amounts of wealth in the economy, particularly among those households who face the most volatile stream of income.

Suggested Citation

Hurst, Erik and Kennickell, Arthur B. and Lusardi, Annamaria and Torralba, Francisco Miguel, Precautionary Savings and the Importance of Business Owners (November 2005). NBER Working Paper No. w11731. Available at SSRN: https://ssrn.com/abstract=842466

Erik Hurst (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
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United States

National Bureau of Economic Research (NBER)

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Arthur B. Kennickell

Federal Reserve Board - Department of Research & Statistics ( email )

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202-452-5295 (Fax)

Annamaria Lusardi

George Washington University - Department of Accountancy ( email )

George Washington University School of Business
Washington, DC 20052
United States

HOME PAGE: http://business.gwu.edu/profiles/annamaria-lusardi/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Francisco Miguel Torralba

University of Chicago - Department of Economics ( email )

1126 East 59th Street
Chicago, IL 60637
United States

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