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
Publisher Statement
Access to external full text or publisher's version may require subscription.
Full-text Version
Publisher’s Version
Language
English