Risk Aversion and Precautionary Savings in Dynamic Settings
Antoine Bommier, François Le Grand
Management Science · 2019 · Volume 65 · Issue 3
Abstract
We study the saving behavior of infinitely long-lived agents who face income uncertainty and deterministic interest rates. Using monotone recursive preferences, we prove that risk aversion unambiguously increases savings. The result accounts for possibly binding borrowing constraints and holds for very general specification of income uncertainty, which can follow any kind of stochastically monotone process. Codes are available at https://doi.org/10.1287/mnsc.2017.2959 . This paper was accepted by Han Bleichrodt, decision analysis.
Keywords
risk aversion, precautionary savings, recursive models, risk-sensitive preferences, monotonicity
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