Precautionary motives with multiple instruments

Christoph Heinzel and Richard Peter

No 21-09, Working Papers SMART from INRAE UMR SMART

Abstract: Using a unified approach, we show how precautionary saving, self-protection and self-insurance are jointly determined by risk preferences and the preference over the timing of uncertainty resolution. We cover higher-order risk effects and examine both risk averters and risk lovers. When decision-makers use several instruments simultaneously to respond to income risk, substitutive interaction effects arise. We quantify precautionary and substitution effects numerically and discuss the role of instrument interaction for the inference of preference parameters from precautionary motives. Instruments can differ substantially in the size of the precautionary motive and in the susceptibility to substitution effects. This affects their suitability for the identification of precautionary preferences.

Keywords: Préférences récursives; prudence; comportement de précaution; effets d’interaction; statique comparative. (search for similar items in EconPapers)
JEL-codes: D11 D80 D81 G22 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2021
New Economics Papers: this item is included in nep-ias, nep-rmg and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:rae:wpaper:202109

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