A Theory of Saving under Risk Preference Dynamics

Qingyin Ma, Xinxi Song and Alexis Akira Toda

Papers from arXiv.org

Abstract: Empirical evidence shows that wealthy households have substantially higher saving rates and markedly lower marginal propensity to consume (MPC) than other groups. Existing theory can account for this pattern only under restrictive assumptions on returns, discounting, and preferences. This paper develops a general theory of optimal savings with preference shocks, allowing risk aversion to vary across states and over time. We show that incorporating such heterogeneity in risk attitudes fundamentally alters the asymptotic dynamics of consumption and saving. In particular, we provide an analytical characterization of the asymptotic MPCs and show that zero asymptotic MPCs, corresponding to a 100\% asymptotic saving rate, arise under markedly weaker conditions than in existing theory. Strikingly, such outcomes occur whenever there is a positive probability that agents become less risk averse in the future. As a result, the vanishing MPC emerges as a generic feature rather than a knife-edge result of the optimal savings model, offering a more theoretically robust and empirically consistent account of the saving behavior of wealthy households.

Date: 2025-11
New Economics Papers: this item is included in nep-fdg and nep-upt
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