Prudence, intertemporal substitution, and savings under uncertainty

Arthur HAU

Research output: Journal PublicationsJournal Article (refereed)

2 Citations (Scopus)

Abstract

This paper derives the relations between the coefficient of absolute prudence, the equivalent precautionary premium, risk aversion to concentration, and the normality and shift of current consumption under uncertainty, without the time-separable utility assumption. Examples show that Kimball's coefficient of absolute prudence does not fully characterize precautionary saving or saving behavior under uncertainty. It is proved that, whereas a higher rate of intertemporal substitution and a larger coefficient of absolute prudence imply more savings when current consumption is normal, a larger coefficient of intertemporal substitution and a smaller coefficient of absolute prudence imply more savings when current consumption is inferior.
Original languageEnglish
Pages (from-to)35-52
Number of pages18
JournalJournal of Economics/ Zeitschrift fur Nationalokonomie
Volume77
Issue number1
DOIs
Publication statusPublished - Oct 2002

Fingerprint

Intertemporal substitution
Coefficients
Savings
Prudence
Uncertainty
Normality
Precautionary saving
Saving behavior
Premium
Risk aversion

Keywords

  • Absolute prudence
  • Equivalent precautionary premium
  • Intertemporal substitution
  • Precautionary savings
  • Savings

Cite this

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Prudence, intertemporal substitution, and savings under uncertainty. / HAU, Arthur.

In: Journal of Economics/ Zeitschrift fur Nationalokonomie, Vol. 77, No. 1, 10.2002, p. 35-52.

Research output: Journal PublicationsJournal Article (refereed)

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AB - This paper derives the relations between the coefficient of absolute prudence, the equivalent precautionary premium, risk aversion to concentration, and the normality and shift of current consumption under uncertainty, without the time-separable utility assumption. Examples show that Kimball's coefficient of absolute prudence does not fully characterize precautionary saving or saving behavior under uncertainty. It is proved that, whereas a higher rate of intertemporal substitution and a larger coefficient of absolute prudence imply more savings when current consumption is normal, a larger coefficient of intertemporal substitution and a smaller coefficient of absolute prudence imply more savings when current consumption is inferior.

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