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Optimal saving in the presence of two small risks

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Author Info
M. Menegatti ()

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Abstract

We examine optimal saving in the presence of two small risks: income risk and a background risk. First, we compute the necessary and sufficient condition for a positive precautionary saving, showing that it depends on two terms capturing respectively the direct effect of income risk and the interaction between the two risks. Secondly, we examine the necessary and sufficient condition for a positive extra-saving due to the contemporaneous presence of the two risks. We show that this condition also depends on a term capturing the direct effect of background risk and that it can hold independently of the previous one.

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File URL: http://swrwebeco.econ.unipr.it/RePEc/pdf/I_2008-01.pdf
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Publisher Info
Paper provided by Department of Economics, Parma University (Italy) in its series Economics Department Working Papers with number 2008-EP01.

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Length: 14 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:par:dipeco:2008-ep01

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Related research
Keywords: Precautionary saving Background risk Uncertainty

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

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This page was last updated on 2008-11-13.

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