Precautionary Savings and the Importance of Business Owners

35 Pages Posted: 23 Jun 2006  

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: December 2006

Abstract

In this paper, we show the pivotal role business owners play in estimating the importance of the precautionary saving motive. The fact that business owners hold higher-than-average wealth while facing higher income risk than other households leads to a correlation between wealth and labor income risk regardless of whether or not a precautionary motive is important. Using data from the Panel Study of Income Dynamics in the 1980s and the 1990s, we show that within separate samples of 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 these two groups leads to an artificially high estimate of the importance of precautionary savings. 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 labor income.

Keywords: Income Risk, Household Wealth, Entrepreneurship

JEL Classification: D91

Suggested Citation

Hurst, Erik and Kennickell, Arthur B. and Lusardi, Annamaria and Torralba, Francisco Miguel, Precautionary Savings and the Importance of Business Owners (December 2006). CFS Working Paper No. 2006/16. Available at SSRN: https://ssrn.com/abstract=910809 or http://dx.doi.org/10.2139/ssrn.910809

Erik Hurst

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Arthur B. Kennickell

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

20th & C. St., N.W.
Washington, DC 20551
United States
202-452-2247 (Phone)
202-452-5295 (Fax)

Annamaria Lusardi (Contact Author)

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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