Precautionary saving under recursive preferences

Aj A. Bostian and Christoph Heinzel

Journal of Economic Behavior & Organization, 2024, vol. 228, issue C

Abstract: The preferences responsible for precautionary saving under recursive utility can be decomposed into two channels. One exactly mirrors expected utility, while the other is unique to recursive utility. Although these channels contain numerous competing saving effects, theoretical and numerical comparative statics point to some generalizable features. Risk preferences drive most of precautionary saving, and they are the only higher-order preferences ever expressed. But, plain 2nd-order intertemporal preferences (consumption smoothing) influence total saving far more than any other kind of preference. Precautionary responses to risks beyond 2nd order are minimal. Responses to return risk are typically negative.

Keywords: Precautionary saving; Prudence; Consumption smoothing; Recursive preferences; Return risk; Higher-order risk (search for similar items in EconPapers)
JEL-codes: D15 D81 E21 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:228:y:2024:i:c:s0167268124003846

DOI: 10.1016/j.jebo.2024.106770

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