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Precautionary Saving and the Notion of Ambiguity Prudence

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  • Loïc Berger

Abstract

This letter develops a set of simple conditions under which an individual iswilling to save an extra amount of money due to the presence of ambiguity onits second period wealth. This extra precautionary saving motive is naturallyassociated to the notion of ambiguity prudence.

Suggested Citation

  • Loïc Berger, 2013. "Precautionary Saving and the Notion of Ambiguity Prudence," Working Papers ECARES ECARES 2013-42, ULB -- Universite Libre de Bruxelles.
  • Handle: RePEc:eca:wpaper:2013/151853
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    References listed on IDEAS

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    1. Gierlinger, Johannes & Gollier, Christian, 2008. "Socially Efficient Discounting under Ambiguity Aversion," IDEI Working Papers 561, Institut d'Économie Industrielle (IDEI), Toulouse.
    2. Kimball, Miles S, 1990. "Precautionary Saving in the Small and in the Large," Econometrica, Econometric Society, vol. 58(1), pages 53-73, January.
    3. Ian Jewitt, 1989. "Choosing Between Risky Prospects: The Characterization of Comparative Statics Results, and Location Independent Risk," Management Science, INFORMS, vol. 35(1), pages 60-70, January.
    4. Klibanoff, Peter & Marinacci, Massimo & Mukerji, Sujoy, 2009. "Recursive smooth ambiguity preferences," Journal of Economic Theory, Elsevier, vol. 144(3), pages 930-976, May.
    5. A. Sandmo, 1970. "The Effect of Uncertainty on Saving Decisions," Review of Economic Studies, Oxford University Press, vol. 37(3), pages 353-360.
    6. Daniel Ellsberg, 1961. "Risk, Ambiguity, and the Savage Axioms," The Quarterly Journal of Economics, Oxford University Press, vol. 75(4), pages 643-669.
    7. Peter Klibanoff & Massimo Marinacci & Sujoy Mukerji, 2005. "A Smooth Model of Decision Making under Ambiguity," Econometrica, Econometric Society, vol. 73(6), pages 1849-1892, November.
    8. Hayne E. Leland, 1968. "Saving and Uncertainty: The Precautionary Demand for Saving," The Quarterly Journal of Economics, Oxford University Press, vol. 82(3), pages 465-473.
    9. Dreze, Jacques H. & Modigliani, Franco, 1972. "Consumption decisions under uncertainty," Journal of Economic Theory, Elsevier, vol. 5(3), pages 308-335, December.
    10. Loïc Berger, 2011. "Smooth Ambiguity Aversion in the Small and in the Large," Working Papers ECARES ECARES 2011-020, ULB -- Universite Libre de Bruxelles.
    11. Kreps, David M & Porteus, Evan L, 1978. "Temporal Resolution of Uncertainty and Dynamic Choice Theory," Econometrica, Econometric Society, vol. 46(1), pages 185-200, January.
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    Citations

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    Cited by:

    1. Simon Quemin, 2016. "Intertemporal abatement decisions under ambiguity aversion in a cap and trade," Working Papers 1604, Chaire Economie du climat.
    2. Kajii, Atsushi & Xue, Jingyi, 2016. "Precautionary Saving with Changing Income Ambiguity," Economics and Statistics Working Papers 2-2017, Singapore Management University, School of Economics.
    3. Loic Berger & Valentina Bosetti, 2016. "Ellsberg re-revisited: An experiment disentangling model uncertainty and risk aversion," Working Papers 576, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    4. Loïc Berger, 2016. "The impact of ambiguity and prudence on prevention decisions," Theory and Decision, Springer, vol. 80(3), pages 389-409, March.
    5. repec:eee:eecrev:v:103:y:2018:i:c:p:108-124 is not listed on IDEAS
    6. Loïc Berger, 2014. "The Impact of Ambiguity Prudence on Insurance and Prevention," Working Papers ECARES ECARES 2014-08, ULB -- Universite Libre de Bruxelles.

    More about this item

    Keywords

    ambiguity aversion; non-expected utility; uncertainty; saving; prudence;

    JEL classification:

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