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Precautionary wealth accumulation: a positive third derivative is not enough

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  • Huggett, Mark
  • Vidon, Edouard

Abstract

It is commonly conjectured that expected wealth accumulation increases when earnings risk increases as long as the utility function in each period is increasing, concave and has a positive third derivative. We present a counter example which highlights the importance of the convexity of the savings function.
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Suggested Citation

  • Huggett, Mark & Vidon, Edouard, 2002. "Precautionary wealth accumulation: a positive third derivative is not enough," Economics Letters, Elsevier, vol. 76(3), pages 323-329, August.
    • Handle: RePEc:eee:ecolet:v:76:y:2002:i:3:p:323-329
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    1. Kimball, Miles S, 1990. "Precautionary Saving in the Small and in the Large," Econometrica, Econometric Society, vol. 58(1), pages 53-73, January.
    2. Miller, Bruce L., 1976. "The effect on optimal consumption of increased uncertainty in labor income in the multiperiod case," Journal of Economic Theory, Elsevier, vol. 13(1), pages 154-167, August.
    3. A. Sandmo, 1970. "The Effect of Uncertainty on Saving Decisions," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 37(3), pages 353-360.
    4. Carroll, Christopher D & Kimball, Miles S, 1996. "On the Concavity of the Consumption Function," Econometrica, Econometric Society, vol. 64(4), pages 981-992, July.
    5. Mark Huggett, 2004. "Precautionary Wealth Accumulation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 71(3), pages 769-781.
    6. Martin Browning & Annamaria Lusardi, 1996. "Household Saving: Micro Theories and Micro Facts," Journal of Economic Literature, American Economic Association, vol. 34(4), pages 1797-1855, December.
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    8. Sibley, David S., 1975. "Permanent and transitory income effects in a model of optimal consumption with wage income uncertainty," Journal of Economic Theory, Elsevier, vol. 11(1), pages 68-82, August.
    9. Hayne E. Leland, 1968. "Saving and Uncertainty: The Precautionary Demand for Saving," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 82(3), pages 465-473.
    10. Schechtman, Jack, 1976. "An income fluctuation problem," Journal of Economic Theory, Elsevier, vol. 12(2), pages 218-241, April.
    11. Haim Mendelson & Yakov Amihud, 1982. "Optimal Consumption Policy under Uncertain Income," Management Science, INFORMS, vol. 28(6), pages 683-697, June.
    12. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
    13. Caballero, Ricardo J, 1991. "Earnings Uncertainty and Aggregate Wealth Accumulation," American Economic Review, American Economic Association, vol. 81(4), pages 859-871, September.
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    Cited by:

    1. Henrik Vetter, 2014. "Ad Valorem versus Unit Taxes in Oligopoly and Endogenous Market Conduct," Public Finance Review, , vol. 42(4), pages 532-551, July.
    2. Andrew B. Abel & Stavros Panageas, 2020. "Precautionary Saving in a Financially-Constrained Firm," NBER Working Papers 26628, National Bureau of Economic Research, Inc.
    3. Suen, Richard M. H., 2011. "Concave consumption function and precautionary wealth accumulation," MPRA Paper 34774, University Library of Munich, Germany.
    4. Ghiglino, Christian, 2005. "Wealth inequality and dynamic stability," Journal of Economic Theory, Elsevier, vol. 124(1), pages 106-115, September.
    5. Mark Huggett, 2004. "Precautionary Wealth Accumulation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 71(3), pages 769-781.
    6. Andrew B Abel & Stavros Panageas, 2023. "Precautionary Saving in a Financially Constrained Firm," Review of Financial Studies, Society for Financial Studies, vol. 36(7), pages 2878-2921.
    7. Wills, Samuel, 2018. "Leave the volatility fund alone: Principles for managing oil wealth," Journal of Macroeconomics, Elsevier, vol. 55(C), pages 332-352.
    8. Feigenbaum, James, 2011. "Precautionary saving or denied dissaving," Economic Modelling, Elsevier, vol. 28(4), pages 1559-1572, July.

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    More about this item

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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