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Optimal Saving with Additive and Multiplicative Background Risk

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  • Lionel, ARTIGE

    (Universitat Autonoma de Barcelona (Spain))

Abstract

We study optimal saving when incomes are certain and risk bears on consumption. A key finding is that, with CARA utility and additive uncertain consumption, or CRRA utility and multiplicative consumption, risk-averse individuals do not form precautionary saving as in the standard theory of saving under uncertainty.

Suggested Citation

  • Lionel, ARTIGE, 2004. "Optimal Saving with Additive and Multiplicative Background Risk," LIDAM Discussion Papers IRES 2004030, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    • Handle: RePEc:ctl:louvir:2004030
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    File URL: http://sites.uclouvain.be/econ/DP/IRES/2004-30.pdf
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    References listed on IDEAS

    as
    1. A. Sandmo, 1970. "The Effect of Uncertainty on Saving Decisions," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 37(3), pages 353-360.
    2. Günter Franke & Harris Schlesinger & Richard C. Stapleton, 2006. "Multiplicative Background Risk," Management Science, INFORMS, vol. 52(1), pages 146-153, January.
    3. Christian Gollier, 2004. "The Economics of Risk and Time," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262572249, December.
    4. Kimball, Miles S, 1990. "Precautionary Saving in the Small and in the Large," Econometrica, Econometric Society, vol. 58(1), pages 53-73, January.
    5. Hayne E. Leland, 1968. "Saving and Uncertainty: The Precautionary Demand for Saving," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 82(3), pages 465-473.
    6. Dreze, Jacques H. & Modigliani, Franco, 1972. "Consumption decisions under uncertainty," Journal of Economic Theory, Elsevier, vol. 5(3), pages 308-335, December.
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    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • D9 - Microeconomics - - Micro-Based Behavioral Economics

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