Subjective Income Risk And Precautionary Saving

Econometric studies have produced conflicting results on the relevance of precautionary saving. This ambiguity has been often ascribed to i) the difficulty of measuring key variables, like households’ subjective risk in income and permanent income; ii) the occurrence of certain kinds of endogeneity bias associated to the unobservability of individual characteristics, like preferences and trade opportunities. In the present work we investigate these estimation problems exploiting a particular wave of the Italian Survey of Household Income and Wealth which contains both type of information. Our results quantify the average precautionary saving as 4-6 percent of total net wealth. Robustness check are carried out considering two more liquid measures of wealth, and alternative sample definitions. Finally, we use our data set to assess the relevance of the endogeneity bias related to the omission of preference characteristics, like patience and risk-aversion, and of indicators of the households’ insurance possibilities, like those signaling the presence of various forms of liquidity and credit constraints.