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Revisiting precautionary saving under ambiguity

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  • Peter, Richard

Abstract

I study the two-period consumption-saving problem with non-separable utility under ambiguity. Under smooth ambiguity aversion, ambiguity and greater ambiguity aversion raise optimal saving. When relative prudence in ambiguity preferences does not exceed 2, agents who perceive greater ambiguity have a higher demand for saving. While a convex marginal ambiguity function is not sufficient for precautionary saving in time-separable models (Berger, 2014), I show that it is not even necessary in a time non-separable setting.

Suggested Citation

  • Peter, Richard, 2019. "Revisiting precautionary saving under ambiguity," Economics Letters, Elsevier, vol. 174(C), pages 123-127.
    • Handle: RePEc:eee:ecolet:v:174:y:2019:i:c:p:123-127
    DOI: 10.1016/j.econlet.2018.11.009
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    References listed on IDEAS

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    Cited by:

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    2. Eric André & Antoine Bommier & François Le Grand, 2022. "The impact of risk aversion and ambiguity aversion on annuity and saving choices," Journal of Risk and Uncertainty, Springer, vol. 65(1), pages 33-56, August.
    3. Malafry, Laurence & Brinca, Pedro, 2022. "Climate policy in an unequal world: Assessing the cost of risk on vulnerable households," Ecological Economics, Elsevier, vol. 194(C).
    4. Suen, Richard M. H., 2022. "Precautionary Saving Behaviour under Ambiguity," MPRA Paper 114382, University Library of Munich, Germany.
    5. Claudio Bonilla & Marcos Vergara, 2022. "New results on precautionary saving and nonlinear risks," Journal of Economics, Springer, vol. 136(2), pages 177-189, July.
    6. Caliendo, Frank N. & Gorry, Aspen & Slavov, Sita, 2020. "Survival ambiguity and welfare," Journal of Economic Behavior & Organization, Elsevier, vol. 170(C), pages 20-42.
    7. Yuanping Wang & Yingjie Niu & Siwen Gong, 2022. "Robust consumption policy with the desire for wealth accumulation," Review of Economics of the Household, Springer, vol. 20(3), pages 993-1025, September.
    8. Peter, Richard & Ying, Jie, 2020. "Do you trust your insurer? Ambiguity about contract nonperformance and optimal insurance demand," Journal of Economic Behavior & Organization, Elsevier, vol. 180(C), pages 938-954.
    9. Takao Asano & Yusuke Osaki, 2020. "Portfolio allocation problems between risky and ambiguous assets," Annals of Operations Research, Springer, vol. 284(1), pages 63-79, January.

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    More about this item

    Keywords

    Ambiguity aversion; Non-expected utility; Uncertainty; Saving; Comparative statics;
    All these keywords.

    JEL classification:

    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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