How Changing Prudence and Risk Aversion Affect Optimal Saving

15 Pages Posted: 28 Oct 2008

See all articles by Christian Bauer

Christian Bauer

Ludwig Maximilians University of Munich - Department of Economics

Wolfgang Buchholz

Universitaet Regensburg; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: October 2008

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

JEL Classification: D11, D81, E21, H43

Suggested Citation

Bauer, Christian Josef and Buchholz, Wolfgang, How Changing Prudence and Risk Aversion Affect Optimal Saving (October 2008). CESifo Working Paper Series No. 2438, Available at SSRN: https://ssrn.com/abstract=1291112 or http://dx.doi.org/10.2139/ssrn.1291112

Christian Josef Bauer

Ludwig Maximilians University of Munich - Department of Economics ( email )

Geschwister-Scholl-Platz 1
Munich, DE Bavaria 80539
Germany

Wolfgang Buchholz (Contact Author)

Universitaet Regensburg ( email )

D-93040 Regensburg, 93053
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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