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The Importance of Business Owners in Assessing the Size of Precautionary Savings

Author

Listed:
  • Erik Hurst

    (University of Chicago and NBER)

  • Annamaria Lusardi

    (Dartmouth College and NBER)

  • Arthur Kennickell

    (Board of Governors of the Federal Reserve System)

  • Francisco Torralba

    (University of Chicago)

Abstract

Not properly accounting for differences between business owners and nonbusiness owners in studies of household wealth can lead to erroneous conclusions about the significance of different saving motives. Using data from the Panel Study of Income Dynamics from the 1980s and 1990s, we show that within samples of both business owners and non-business owners, the amount of precautionary savings with respect to labor income risk is modest and accounts for less than 10% of total household wealth. Previous large estimates of the size of precautionary balances resulted from pooling these two groups together. Such pooling is inappropriate given that business owners face higher labor risk and accumulate more wealth than non-business owners for reasons unrelated to precautionary motives. © 2010 The President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Suggested Citation

  • Erik Hurst & Annamaria Lusardi & Arthur Kennickell & Francisco Torralba, 2010. "The Importance of Business Owners in Assessing the Size of Precautionary Savings," The Review of Economics and Statistics, MIT Press, vol. 92(1), pages 61-69, February.
  • Handle: RePEc:tpr:restat:v:92:y:2010:i:1:p:61-69
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    Citations

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    Cited by:

    1. Durfari Velandia Naranjo & Edwin Gameren, 2016. "Precautionary Savings in Mexico: Evidence From the Mexican Health and Aging Study," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 62(2), pages 334-361, June.
    2. Yunju Nam & Yungsoo Lee & Shawn McMahon & Michael Sherraden, 2016. "New Measures of Economic Security and Development: Savings Goals for Short- and Long-Term Economic Needs," Journal of Consumer Affairs, Wiley Blackwell, vol. 50(3), pages 611-637, November.
    3. Annamaria Lusardi, 2015. "Risk Literacy," Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, Springer;Società Italiana degli Economisti (Italian Economic Association), vol. 1(1), pages 5-23, March.
    4. Annamaria Lusardi, 2010. "Financial Capability in the United States: Consumer Decision-Making and the Role of Social Security," Working Papers wp226, University of Michigan, Michigan Retirement Research Center.
    5. Frank M. Fossen & Davud Rostam-Afschar, 2013. "Precautionary and Entrepreneurial Savings: New Evidence from German Households," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 75(4), pages 528-555, August.
    6. Jin, Ling & Chen, Kevin Z. & Yu, Bingxin & Huang, Zuhui, 2011. "How prudent are rural households in developing transition economies:," IFPRI discussion papers 1127, International Food Policy Research Institute (IFPRI).
    7. repec:taf:vhimxx:v:50:y:2017:i:3:p:144-155 is not listed on IDEAS
    8. Fulford, Scott L., 2015. "The surprisingly low importance of income uncertainty for precaution," European Economic Review, Elsevier, vol. 79(C), pages 151-171.
    9. Johannes Geyer, 2011. "The Effect of Health and Employment Risks on Precautionary Savings," SOEPpapers on Multidisciplinary Panel Data Research 408, DIW Berlin, The German Socio-Economic Panel (SOEP).
    10. Barceló, Cristina & Villanueva, Ernesto, 2016. "The response of household wealth to the risk of job loss: Evidence from differences in severance payments," Labour Economics, Elsevier, vol. 39(C), pages 35-54.
    11. Li, Yue & Mastrogiacomo, Mauro & Hochguertel, Stefan & Bloemen, Hans, 2016. "The role of wealth in the start-up decision of new self-employed: Evidence from a pension policy reform," Labour Economics, Elsevier, vol. 41(C), pages 280-290.
    12. Simone A. Wegge & Tyler Anbinder & Cormac Ó Gráda, 2017. "Immigrants and savers: A rich new database on the Irish in 1850s New York," Historical Methods: A Journal of Quantitative and Interdisciplinary History, Taylor & Francis Journals, vol. 50(3), pages 144-155, July.
    13. Verkaart, Simone & Munyua, Bernard G. & Mausch, Kai & Michler, Jeffrey D., 2017. "Welfare impacts of improved chickpea adoption: A pathway for rural development in Ethiopia?," Food Policy, Elsevier, vol. 66(C), pages 50-61.

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