RIEB Discussion Paper Series No.2025-28

Title

Do Non-Prudent Consumers Ever Engage in Precautionary Saving? Two Observations on Risk and Precautionary Saving

Abstract

Previous authors have asserted that precautionary saving will arise only if consumers are not only risk-averse but also prudent, but in this paper, we first show that when saving occurs in the context of a financial economy featuring at least one other asset, prudence is neither necessary, nor sufficient, to generate precautionary saving, i.e. saving induced only by variance in income. Then, simplifying and elaborating on some results presented in Eeckhoudt and Schlesinger (2008), we address a particular form of precautionary saving, which we name “intertemporal precautionary saving” to distinguish it from purely intertemporal and purely precautionary saving, and show that it will inevitably arise in the case of pure (downside) risk as long as consumers are risk-averse, regardless of whether or not they are prudent, and that prudence will affect only its extent. Thus, our paper challenges the conventional wisdom on precautionary saving in at least two ways.

Keywords

Household saving; Precautionary saving; Prudence; Pure risk; Risk aversion; Saving; Speculative risk

JEL Classification

D11, D14, D15, D81, E21, G51

Inquiries

Luigi VENTURA
Department of Economics and Law, Sapienza, University of Rome, ITALY

Charles Yuji HORIOKA
Research Institute for Economics and Business Administration,
Kobe University, JAPAN
Rokkodai-cho, Nada-ku, Kobe
657-8501 Japan
Phone: +81-78-803-7036
FAX: +81-78-803-7059
Institute of Social and Economic Research, Osaka University, JAPAN
Asian Growth Research Institute, JAPAN
National Bureau of Economic Research, U.S.A.