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Changes in Risk and the Demand for Saving

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  • Louis Eeckhoudt
  • Harris Schlesinger

Abstract

How does risk affect saving? Empirical work typically examines the effects of detectible differences in risk within the data. How these differences affect saving in theoretical models depends on the metric one uses for risk. For labor-income risk, second-degree increases in risk require prudence to induce increased saving demand. However, prudence is not necessary for first-degree risk increases and not sufficient for higher-degree risk increases. For increases in interest rate risk, a precautionary effect and a substitution effect need to be compared. This paper provides necessary and sufficient conditions on preferences for an Nth-degree change in risk to increase saving.

Suggested Citation

  • Louis Eeckhoudt & Harris Schlesinger, 2008. "Changes in Risk and the Demand for Saving," CESifo Working Paper Series 2388, CESifo.
    • Handle: RePEc:ces:ceswps:_2388
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    More about this item

    Keywords

    precautionary saving; prudence; stochastic dominance; temperance;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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