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How Changing Prudence and Risk Aversion Affect Optimal Saving

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Author Info
Christian Bauer ()
Wolfgang Buchholz ()

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Abstract

We show how optimal saving in a two-period model is affected when prudence and risk aversion of the underlying utility function change. Increasing prudence alone will induce higher savings only if, for certain combinations of the interest rate and the pure time discount rate, there is distributional neutrality between the two periods. Otherwise, changes of risk aversion that affect the distribution between the periods must also be taken into account.

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Publisher Info
Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number CESifo Working Paper No. 2438.

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Date of creation: 2008
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Handle: RePEc:ces:ceswps:_2438

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Related research
Keywords: prudence; risk aversion; saving; intergenerational distribution;

Find related papers by JEL classification:
D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate

References listed on IDEAS
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  1. Christian Gollier, 2004. "The Economics of Risk and Time," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262572249, December.
  2. Miles S. Kimball, 1989. "Precautionary Saving in the Small and in the Large," NBER Working Papers 2848, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Sandmo, Agnar, 1970. "The Effect of Uncertainty on Saving Decisions," Review of Economic Studies, Blackwell Publishing, vol. 37(3), pages 353-60, July. [Downloadable!] (restricted)
  4. Menegatti, Mario, 2001. "On the Conditions for Precautionary Saving," Journal of Economic Theory, Elsevier, vol. 98(1), pages 189-193, May. [Downloadable!] (restricted)
  5. Mario Maggi & Umberto Magnani & Mario Menegatti, 2006. "On the relationship between absolute prudence and absolute risk aversion," Decisions in Economics and Finance, Springer, vol. 29(2), pages 155-160, November. [Downloadable!] (restricted)
    Other versions:
  6. Eeckhoudt, Louis & Schlesinger, Harris, 1994. "Increases in prudence and increases in risk aversion," Economics Letters, Elsevier, vol. 45(1), pages 51-53, May. [Downloadable!] (restricted)
  7. M. Menegatti, 2007. "A new interpretation for the precautionary saving motive: a note," Journal of Economics, Springer, vol. 92(3), pages 275-280, December. [Downloadable!] (restricted)
  8. Luigi Ventura, 2007. "A note on the relevance of prudence in precautionary saving," Economics Bulletin, Economics Bulletin, vol. 4(23), pages 1-11. [Downloadable!]
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