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Do Non-Prudent Consumers Ever Engage in Precautionary Saving? Two Observations on Risk and Precautionary Saving

Author

Listed:
  • Luigi Ventura

    (Department of Economics and Law, Sapienza, University of Rome, ITALY)

  • Charles Yuji Horioka

    (Research Institute for Economics and Business Administration, Kobe University, Institute of Social and Economic Research, Osaka University, Asian Growth Research Institute, JAPAN, and National Bureau of Economic Research, U.S.A.)

Abstract

Previous authors have asserted that precautionary saving will arise only if consumers are not only risk-averse but also prudent, but in this paper, we first show that when saving occurs in the context of a financial economy featuring at least one other asset, prudence is neither necessary, nor sufficient, to generate precautionary saving, i.e. saving induced only by variance in income. Then, simplifying and elaborating on some results presented in Eeckhoudt and Schlesinger (2008), we address a particular form of precautionary saving, which we name “intertemporal precautionary saving” to distinguish it from purely intertemporal and purely precautionary saving, and show that it will inevitably arise in the case of pure (downside) risk as long as consumers are risk-averse, regardless of whether or not they are prudent, and that prudence will affect only its extent. Thus, our paper challenges the conventional wisdom on precautionary saving in at least two ways.

Suggested Citation

  • Luigi Ventura & Charles Yuji Horioka, 2025. "Do Non-Prudent Consumers Ever Engage in Precautionary Saving? Two Observations on Risk and Precautionary Saving," Discussion Paper Series DP2025-28, Research Institute for Economics & Business Administration, Kobe University.
    • Handle: RePEc:kob:dpaper:dp2025-28
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    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • 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
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth

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