Title

Prudence, intertemporal substitution, and savings under uncertainty

Document Type

Journal article

Source Publication

Journal of Economics/ Zeitschrift fur Nationalokonomie

Publication Date

10-1-2002

Volume

77

Issue

1

First Page

35

Last Page

52

Keywords

Absolute prudence, Equivalent precautionary premium, Intertemporal substitution, Precautionary savings, Savings

Abstract

This paper derives the relations between the coefficient of absolute prudence, the equivalent precautionary premium, risk aversion to concentration, and the normality and shift of current consumption under uncertainty, without the time-separable utility assumption. Examples show that Kimball's coefficient of absolute prudence does not fully characterize precautionary saving or saving behavior under uncertainty. It is proved that, whereas a higher rate of intertemporal substitution and a larger coefficient of absolute prudence imply more savings when current consumption is normal, a larger coefficient of intertemporal substitution and a smaller coefficient of absolute prudence imply more savings when current consumption is inferior.

DOI

10.1007/s007120200050

Print ISSN

09318658

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