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The surprisingly low importance of income uncertainty for precaution

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  • Scott Fulford

    (Boston College)

Abstract

While it is common to use income uncertainty to explain household saving decisions, there is much disagreement about the importance of precautionary saving. This paper suggests that income uncertainty is not an important motive for saving, although households do have other precautionary reasons to save. Using a question from the Survey of Consumer Finances that asks how much households want for precautionary purposes, this paper shows that expressed household preferences, and liquid savings, are much lower than predicted by standard modeling assumptions. Households rarely list unemployment as a reason to save. Perceived income uncertainty does not affect liquid savings or precautionary preferences. Neither does being in an occupation with higher income volatility. Instead, households seem very concerned with expenditure shocks.

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  • Scott Fulford, 2014. "The surprisingly low importance of income uncertainty for precaution," Boston College Working Papers in Economics 862, Boston College Department of Economics.
  • Handle: RePEc:boc:bocoec:862
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    2. Mariacristina Rossi & Dario Sansone, 2018. "Precautionary savings and the self-employed," Small Business Economics, Springer, vol. 51(1), pages 105-127, June.
    3. Seth Pruitt & Nicholas Turner, 2018. "The Nature of Household Labor Income Risk," Finance and Economics Discussion Series 2018-034, Board of Governors of the Federal Reserve System (U.S.).
    4. Scott L. Fulford & Scott Schuh, 2015. "Consumer revolving credit and debt over the life cycle and business cycle," Working Papers 15-17, Federal Reserve Bank of Boston.
    5. Ben-David, Itzhak & Fermand, Elyas & Kuhnen, Camelia M. & Li, Geng, 2018. "Expectations Uncertainty and Household Economic Behavior," Working Paper Series 2018-25, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    6. Carolina Laureti, 2017. "Why do Poor People Co-hold Debt and Liquid Savings?," Working Papers CEB 17-007, ULB -- Universite Libre de Bruxelles.
    7. Levin, Mark (Левин, Марк) & Matrosova, Ksenia (Матросова, Ксения), 2018. "Development and Research of Economic Behavior of Households in Changing Conditions [Разработка И Исследование Экономического Поведения Домохозяйств В Изменяющихся Условиях]," Working Papers 041825, Russian Presidential Academy of National Economy and Public Administration.
    8. Tullio Jappelli & Luigi Pistaferri, 2020. "Permanent Income Shocks, Target Wealth, and the Wealth Gap," NBER Working Papers 27709, National Bureau of Economic Research, Inc.
    9. Fulgence Dominick Waryoba & Li Jing, 2019. "Consumption Uncertainty Reduction Among Sweet Potato Smallholder Farmers in Tanzania," Global Journal of Emerging Market Economies, Emerging Markets Forum, vol. 11(1-2), pages 132-147, January.

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    More about this item

    Keywords

    Income uncertainty; precaution; buffer-stock model; household saving; consumption;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • 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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