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On the precautionary motive for savings and prudence in the rank-dependent utility framework

Alain Chateauneuf (), Ghizlane Lakhnati and Eric Langlais ()
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Alain Chateauneuf: Paris 1 University

Economic Theory, 2016, vol. 61, issue 1, 169-182

Abstract: Abstract In this paper, we deal with the basic two-period consumption–saving problem where the first- and second-period consumption utilities, $$v$$ v and $$ u$$ u , are assumed to be concave, respectively, as usually. We prove that for the rank-dependent utility model, prudence is fully characterized by the convexity of $$u^{\prime }$$ u ′ and strong pessimism. The paper ends by showing that for a strong risk-averse RDU decision-maker, strict pessimism allows local weak prudence, whatever the sign of $$u^{\prime \prime \prime }$$ u ″ ′ , whereas for a strong risk-averse EU decision-maker local weak prudence cannot be disentangled from prudence.

Keywords: RDU model; Strong risk aversion; Pessimism; Prudence; Local weak prudence (search for similar items in EconPapers)
JEL-codes: D80 D81 (search for similar items in EconPapers)
Date: 2016
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Journal Article: On the precautionary motive for savings and prudence in the rank-dependent utility framework (2016) Downloads
Working Paper: On the precautionary motive for savings and prudence in the rank-dependent utility framework (2016)
Working Paper: On the precautionary motive for savings and prudence in the rank-dependent utility framework (2016)
Working Paper: On the precautionary motive for savings and prudence in the rank dependent utility framework (2014) Downloads
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