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Optimal saving in the presence of two small risks

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  • M. Menegatti

Abstract

We examine optimal saving in the presence of two small risks: income risk and a background risk. First, we compute the necessary and sufficient condition for a positive precautionary saving, showing that it depends on two terms capturing respectively the direct effect of income risk and the interaction between the two risks. Secondly, we examine the necessary and sufficient condition for a positive extra-saving due to the contemporaneous presence of the two risks. We show that this condition also depends on a term capturing the direct effect of background risk and that it can hold independently of the previous one.

Suggested Citation

  • M. Menegatti, 2008. "Optimal saving in the presence of two small risks," Economics Department Working Papers 2008-EP01, Department of Economics, Parma University (Italy).
    • Handle: RePEc:par:dipeco:2008-ep01
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    More about this item

    Keywords

    Precautionary saving; Background risk; Uncertainty;
    All these keywords.

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • 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

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