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On the precautionary motive for savings and prudence in the rank-dependent utility framework

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• Alain Chateauneuf

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• Ghizlane Lakhnati

()

• Eric Langlais

()

Abstract

In this paper, we deal with the basic two-period consumption–saving problem where the first- and second-period consumption utilities, $$v$$ v and $$u$$ u , are assumed to be concave, respectively, as usually. We prove that for the rank-dependent utility model, prudence is fully characterized by the convexity of $$u^{\prime }$$ u ′ and strong pessimism. The paper ends by showing that for a strong risk-averse RDU decision-maker, strict pessimism allows local weak prudence, whatever the sign of $$u^{\prime \prime \prime }$$ u ″ ′ , whereas for a strong risk-averse EU decision-maker local weak prudence cannot be disentangled from prudence. Copyright Springer-Verlag Berlin Heidelberg 2016

Suggested Citation

• Alain Chateauneuf & Ghizlane Lakhnati & Eric Langlais, 2016. "On the precautionary motive for savings and prudence in the rank-dependent utility framework," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 61(1), pages 169-182, January.
• Handle: RePEc:spr:joecth:v:61:y:2016:i:1:p:169-182
DOI: 10.1007/s00199-015-0883-x
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References listed on IDEAS

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More about this item

Keywords

RDU model; Strong risk aversion; Pessimism; Prudence; Local weak prudence; D80; D81;

JEL classification:

• D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
• D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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