Precautionary Saving Behaviour under Ambiguity

Suen, Richard M. H. (2022): Precautionary Saving Behaviour under Ambiguity.

Abstract

This paper analyses a two-period model in which a consumer faces a future income risk but is uncertain about its probability distribution. We derive three sets of sufficient conditions under which a consumer with generalised recursive smooth ambiguity (GRSA) preferences will save more under ambiguity than in a deterministic environment. Our results show how precautionary saving is jointly determined by attitudes toward atemporal risk, ambiguity and intertemporal substitution. We also find a close connection between risk prudence under non-expected utility and precautionary saving under GRSA preferences.

• Item Type: MPRA Paper
• Language: English
• Keywords: Precautionary Saving; Risk Aversion; Intertemporal Substitution; Smooth Ambiguity Preferences.
• Subjects: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D81 - Criteria for Decision-Making under Risk and Uncertainty; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E21 - Consumption ; Saving ; Wealth

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