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Precautionary Savings and Self-Selection - Evidence from the German Reunification "Experiment"

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  • Nicola Fuchs-Schundeln
  • Matthias Schundeln
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    Abstract

    We combine particular features of the German civil service with the unique event of German reunification to test the theory of precautionary savings and to quantify the importance of self-selection into occupations due to differences in risk aversion. In the presence of self-selection, failing to control for risk aversion in empirical tests of precautionary savings results in a bias that could lead to a false rejection of the theory. We exploit the fact that for individuals from the former German Democratic Republic (GDR) German reunification in 1990 caused an exogenous reassignment of income risks. Our findings suggest that self-selection of risk averse individuals into low-risk occupations is economically important and decreases aggregate precautionary wealth holdings significantly.

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    Bibliographic Info

    Paper provided by Harvard - Institute of Economic Research in its series Harvard Institute of Economic Research Working Papers with number 2069.

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    Date of creation: 2005
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    Handle: RePEc:fth:harver:2069

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    Cited by:
    1. Marco Cozzi, 2012. "Risk Aversion Heterogeneity, Risky Jobs and Wealth Inequality," Working Papers 1286, Queen's University, Department of Economics.
    2. Marcos Chamon & Eswar Prasad, 2008. "Why Are Saving Rates of Urban Households in China Rising?," IMF Working Papers 08/145, International Monetary Fund.
    3. Simon Luechinger & Stephan Meier & Alois Stutzer, 2008. "Why Does Unemployment Hurt the Employed? Evidence from the Life Satisfaction Gap between the Public and the Private Sector," Working papers 2008/02, Faculty of Business and Economics - University of Basel.
    4. Simon Luechinger & Stephan Meier & Alois Stutzer, 2008. "Why Does Unemployment Hurt the Employed?: Evidence from the Life Satisfaction Gap between the Public and Private Sectors," SOEPpapers on Multidisciplinary Panel Data Research 106, DIW Berlin, The German Socio-Economic Panel (SOEP).
    5. Nicolas Sauter & Jan Walliser & Joachim Winter, 2010. "Tax Incentives, Bequest Motives, and the Demand for Life Insurance: Evidence from two Natural Experiments in Germany," CESifo Working Paper Series 3040, CESifo Group Munich.
    6. Kohn, Karsten & Antonczyk, Dirk, 2011. "The Aftermath of Reunification: Sectoral Transition, Gender, and Rising Wage Inequality in East Germany," IZA Discussion Papers 5708, Institute for the Study of Labor (IZA).
    7. Luc Arrondel & Hector Calvo Pardo, 2008. "Les Français sont-ils prudents ? Patrimoine et risque sur les revenus des ménages," PSE Working Papers halshs-00585994, HAL.
    8. Claudia R. Sahm, 2007. "Stability of risk preference," Finance and Economics Discussion Series 2007-66, Board of Governors of the Federal Reserve System (U.S.).
    9. Harald Uhlig, 2008. "The Slow Decline of East Germany," NBER Working Papers 14553, National Bureau of Economic Research, Inc.
    10. Erik Hurst & Arthur Kennickell & Annamaria Lusardi & Francisco Torralba, 2005. "Precautionary Savings and the Importance of Business Owners," NBER Working Papers 11731, National Bureau of Economic Research, Inc.

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