How Changing Prudence and Risk Aversion Affect Optimal Saving

Christian Bauer () and Wolfgang Buchholz ()

No 2438, CESifo Working Paper Series from CESifo

Abstract: We show how optimal saving in a two-period model is affected when prudence and risk aversion of the underlying utility function change. Increasing prudence alone will induce higher savings only if, for certain combinations of the interest rate and the pure time discount rate, there is distributional neutrality between the two periods. Otherwise, changes of risk aversion that affect the distribution between the periods must also be taken into account.

Keywords: prudence; risk aversion; saving; intergenerational distribution (search for similar items in EconPapers)
JEL-codes: D11 D81 E21 H43 (search for similar items in EconPapers)
Date: 2008
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Citations: View citations in EconPapers (2)

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