How Changing Prudence and Risk Aversion Affect Optimal Saving
15 Pages Posted: 28 Oct 2008
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: Suggested Citation
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