Optimal saving in the presence of two small risks

Mario Menegatti

No 2008-EP01, Economics Department Working Papers from Department of Economics, Parma University (Italy)

Abstract: We examine optimal saving in the presence of two small risks: income risk and a background risk. First, we compute the necessary and sufficient condition for a positive precautionary saving, showing that it depends on two terms capturing respectively the direct effect of income risk and the interaction between the two risks. Secondly, we examine the necessary and sufficient condition for a positive extra-saving due to the contemporaneous presence of the two risks. We show that this condition also depends on a term capturing the direct effect of background risk and that it can hold independently of the previous one.

Keywords: Precautionary saving; Background risk; Uncertainty (search for similar items in EconPapers)
JEL-codes: D11 D81 E21 (search for similar items in EconPapers)
Pages: 14 pages
Date: 2008
New Economics Papers: this item is included in nep-mac and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:par:dipeco:2008-ep01

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