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

Alain Chateauneuf, Ghizlane Lakhnati and Eric Langlais

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

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. Copyright Springer-Verlag Berlin Heidelberg 2016

Keywords: RDU model; Strong risk aversion; Pessimism; Prudence; Local weak prudence; D80; D81 (search for similar items in EconPapers)
Date: 2016
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Related works:
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 (2016)
Working Paper: On the precautionary motive for savings and prudence in the rank dependent utility framework (2014)
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DOI: 10.1007/s00199-015-0883-x

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