Comparative precautionary saving under higher-order risk and recursive utility

Aj Allen Bostian and Christoph Heinzel (christoph.heinzel@inrae.fr)
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Aj Allen Bostian: University of Tampere
Christoph Heinzel: SMART-LERECO - Structures et Marché Agricoles, Ressources et Territoires - INRA - Institut National de la Recherche Agronomique - AGROCAMPUS OUEST

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Abstract: Measuring and comparing the precautionary saving motive rest almost exclusively on the expected utility framework, and only focus on income risk or coefficients of the Arrow–Pratt type. We generalize the standard approach by characterizing comparative precautionary saving under recursive utility for increases in income risk and increases in risk on the saving return, including higher-order risk effects. We express the comparisons in terms of precautionary premia. In addition, we define a new class of preference coefficients, and derive the associated conditions to predict a stronger precautionary motive. The coefficients provide a detailed picture of the preferences sustaining precautionary saving and could be useful in applications.

Keywords: precautionary saving; prudence; recursive utility; higher-order risk; precautionary premium; preference coefficient (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (3)

Published in Geneva Risk and Insurance Review, 2018, 43 (1), pp.95-114. ⟨10.1057/s10713-018-0030-2⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-02622118

DOI: 10.1057/s10713-018-0030-2

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