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Precautionary Savings and Self-Selection - Evidence from the German Reunification "Experiment"

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  • Nicola Fuchs-Schundeln
  • Matthias Schundeln

Abstract

We combine particular features of the German civil service with the unique event of German reunification to test the theory of precautionary savings and to quantify the importance of self-selection into occupations due to differences in risk aversion. In the presence of self-selection, failing to control for risk aversion in empirical tests of precautionary savings results in a bias that could lead to a false rejection of the theory. We exploit the fact that for individuals from the former German Democratic Republic (GDR) German reunification in 1990 caused an exogenous reassignment of income risks. Our findings suggest that self-selection of risk averse individuals into low-risk occupations is economically important and decreases aggregate precautionary wealth holdings significantly.

Suggested Citation

  • Nicola Fuchs-Schundeln & Matthias Schundeln, 2005. "Precautionary Savings and Self-Selection - Evidence from the German Reunification "Experiment"," Harvard Institute of Economic Research Working Papers 2069, Harvard - Institute of Economic Research.
  • Handle: RePEc:fth:harver:2069
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    Cited by:

    1. Uhlig, Harald, 2008. "The slow decline of East Germany," Journal of Comparative Economics, Elsevier, pages 517-541.
    2. Simon Luechinger & Stephan Meier & Alois Stutzer, 2010. "Why Does Unemployment Hurt the Employed?: Evidence from the Life Satisfaction Gap Between the Public and the Private Sector," Journal of Human Resources, University of Wisconsin Press, vol. 45(4), pages 998-1045.
    3. He, Hui & Huang, Feng & Liu, Zheng & Zhu, Dongming, 2014. "Breaking the “Iron Rice Bowl” and Precautionary Swings: Evidence from Chinese State-Owned Enterprises Reform," Working Paper Series 2014-4, Federal Reserve Bank of San Francisco, revised 14 Feb 2017.
    4. Marco Cozzi, 2012. "Risk Aversion Heterogeneity, Risky Jobs and Wealth Inequality," Working Papers 1286, Queen's University, Department of Economics.
    5. Harald Uhlig, 2006. "Regional Labor Markets, Network Externalities and Migration: The Case of German Reunification," American Economic Review, American Economic Association, vol. 96(2), pages 383-387, May.
    6. Claudia R. Sahm, 2007. "Stability of risk preference," Finance and Economics Discussion Series 2007-66, Board of Governors of the Federal Reserve System (U.S.).
    7. Saving and Investment Task Force & Rodriguez-Palenzuela, Diego & Dées, Stéphane & Andersson, Malin & Bijsterbosch, Martin & Forster, Katrin & Zorell, Nico & Audoly, Richard & Buelens, Christian & Comp, 2016. "Savings and investment behaviour in the euro area," Occasional Paper Series 167, European Central Bank.
    8. Meghir, Costas & Pistaferri, Luigi, 2011. "Earnings, Consumption and Life Cycle Choices," Handbook of Labor Economics, Elsevier.
    9. Marcos D. Chamon & Eswar S. Prasad, 2010. "Why Are Saving Rates of Urban Households in China Rising?," American Economic Journal: Macroeconomics, American Economic Association, pages 93-130.
    10. Desbonnet, Audrey & Kankanamge, Sumudu, 2017. "Public Debt And Aggregate Risk," Macroeconomic Dynamics, Cambridge University Press, pages 1996-2032.
    11. Nicolas Sauter & Jan Walliser & Joachim Winter, 2010. "Tax Incentives, Bequest Motives, and the Demand for Life Insurance: Evidence from two Natural Experiments in Germany," CESifo Working Paper Series 3040, CESifo Group Munich.
    12. Simon Luechinger & Stephan Meier & Alois Stutzer, 2008. "Why does unemployment hurt the employed?: evidence from the life satisfaction gap between the public and private sectors," Public Policy Discussion Paper 08-1, Federal Reserve Bank of Boston.
    13. Erik Hurst & Arthur Kennickell & Annamaria Lusardi & Francisco Torralba, 2005. "Precautionary Savings and the Importance of Business Owners," NBER Working Papers 11731, National Bureau of Economic Research, Inc.
    14. Kohn, Karsten & Antonczyk, Dirk, 2011. "The Aftermath of Reunification: Sectoral Transition, Gender, and Rising Wage Inequality in East Germany," IZA Discussion Papers 5708, Institute for the Study of Labor (IZA).
    15. Luc Arrondel & Hector Calvo Pardo, 2008. "Les Français sont-ils prudents ? Patrimoine et risque sur les revenus des ménages," PSE Working Papers halshs-00585994, HAL.

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