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Prudence and precautionary saving

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Abstract

Households save income for various reasons, including the need to plan for the future, the intention to leave a bequest, and the desire to guard against unforeseen expenditures and income fluctuations. Although it is widely believed that prudent individuals engage in precautionary saving, the extent of such saving is not well understood. This paper develops a model of saving with an explicit role for the Leland-Kimball measure of prudence. Estimation of the model using household-level data from Italy suggests an average value of relative prudence near 4 or 5, with approximately 15 to 36 percent of total saving being precautionary.

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Authors and Affiliations

  1. Dipartimento di Scienze Economiche, Università di Roma “La Sapienza”, Roma, Italy

    Luigi Ventura

  2. Department of Economics and Finance, Canisius College, Buffalo, USA

    Joseph G. Eisenhauer

Authors
  1. Luigi Ventura
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  2. Joseph G. Eisenhauer
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The authors are grateful to an anonymous referee for helpful comments.

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Ventura, L., Eisenhauer, J.G. Prudence and precautionary saving. J Econ Finan 30, 155–168 (2006). https://doi.org/10.1007/BF02761482

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