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Precautionary Wealth Accumulation: A Positive Third Derivative is not Enough

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Abstract

It is commonly conjectured that expected wealth accumulation increases when earnings risk increases as long as the utility function in each period is increasing, concave and has a positive third derivative. We present a counter example which highlights the importance of the convexity of the savings function.

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  • Mark Huggett and Edouard Vidon, 2003. "Precautionary Wealth Accumulation: A Positive Third Derivative is not Enough," Working Papers gueconwpa~03-03-11, Georgetown University, Department of Economics.
  • Handle: RePEc:geo:guwopa:gueconwpa~03-03-11
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    1. Kimball, Miles S, 1990. "Precautionary Saving in the Small and in the Large," Econometrica, Econometric Society, vol. 58(1), pages 53-73, January.
    2. Miller, Bruce L., 1976. "The effect on optimal consumption of increased uncertainty in labor income in the multiperiod case," Journal of Economic Theory, Elsevier, vol. 13(1), pages 154-167, August.
    3. Carroll, Christopher D & Kimball, Miles S, 1996. "On the Concavity of the Consumption Function," Econometrica, Econometric Society, vol. 64(4), pages 981-992, July.
    4. Mark Huggett, 2004. "Precautionary Wealth Accumulation," Review of Economic Studies, Oxford University Press, vol. 71(3), pages 769-781.
    5. Martin Browning & Annamaria Lusardi, 1996. "Household Saving: Micro Theories and Micro Facts," Journal of Economic Literature, American Economic Association, vol. 34(4), pages 1797-1855, December.
    6. Philippe Weil, 1993. "Precautionary Savings and the Permanent Income Hypothesis," Review of Economic Studies, Oxford University Press, vol. 60(2), pages 367-383.
    7. A. Sandmo, 1970. "The Effect of Uncertainty on Saving Decisions," Review of Economic Studies, Oxford University Press, vol. 37(3), pages 353-360.
    8. Sibley, David S., 1975. "Permanent and transitory income effects in a model of optimal consumption with wage income uncertainty," Journal of Economic Theory, Elsevier, vol. 11(1), pages 68-82, August.
    9. Schechtman, Jack, 1976. "An income fluctuation problem," Journal of Economic Theory, Elsevier, vol. 12(2), pages 218-241, April.
    10. Haim Mendelson & Yakov Amihud, 1982. "Optimal Consumption Policy under Uncertain Income," Management Science, INFORMS, vol. 28(6), pages 683-697, June.
    11. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
    12. Caballero, Ricardo J, 1991. "Earnings Uncertainty and Aggregate Wealth Accumulation," American Economic Review, American Economic Association, vol. 81(4), pages 859-871, September.
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    Cited by:

    1. Suen, Richard M. H., 2011. "Concave consumption function and precautionary wealth accumulation," MPRA Paper 34774, University Library of Munich, Germany.
    2. Ghiglino, Christian, 2005. "Wealth inequality and dynamic stability," Journal of Economic Theory, Elsevier, vol. 124(1), pages 106-115, September.
    3. Mark Huggett, 2004. "Precautionary Wealth Accumulation," Review of Economic Studies, Oxford University Press, vol. 71(3), pages 769-781.
    4. Feigenbaum, James, 2011. "Precautionary saving or denied dissaving," Economic Modelling, Elsevier, vol. 28(4), pages 1559-1572, July.

    More about this item

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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