The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Precautionary Saving and Precautionary Wealth

  • Christopher D. Carroll
  • Miles S. Kimball
Reference work entry


Precautionary saving measures the consequences of uncertainty for the rate of change (and therefore the level) of wealth. The qualitative aspects of precautionary saving theory are now well established: an increase in uncertainty will increase the level of saving, but will reduce the marginal propensity to save. Quantitatively, theory combined with empirical estimates of risk aversion suggests that precautionary saving and precautionary wealth should be quite large. More direct empirical evidence on precautionary saving suggests that precautionary effects on saving are substantial, but the magnitude of the effects is disputed, and the different estimates are not all expressed in comparable units.


Calibration Consumption function Elasticity of intertemporal substitution Euler equations Impatience Liquidity constraints Perfect foresight Precautionary saving Precautionary savings Precautionary wealth Preferences Risk aversion Time consistency Uncertainty 

JEL Classifications

D4 D10 
This is a preview of subscription content, log in to check access.


  1. Barsky, R.B., N. Gregory Mankiw, and S.P. Zeldes. 1986. Ricardian consumers with Keynesian propensities. American Economic Review 76: 676–691.Google Scholar
  2. Browning, M.J., and A. Lusardi. 1996. Household saving: Micro theories and micro facts. Journal of Economic Literature 34: 1797–1855.Google Scholar
  3. Cagetti, M. 2003. Wealth accumulation over the life cycle and precautionary savings. Journal of Business and Economic Statistics 21: 339–353.CrossRefGoogle Scholar
  4. Carroll, C.D. 2000. Solving consumption models with multiplicative habits. Economics Letters 68: 67–77.CrossRefGoogle Scholar
  5. Carroll, C.D. 2001. Death to the log-linearized consumption Euler equation! (and very poor health to the second-order approximation). Advances in Macroeconomics 1, Article 6.Google Scholar
  6. Carroll, C.D. 2004. Theoretical foundations of buffer stock saving. Working paper no. 10867. Cambridge, MA: NBER.Google Scholar
  7. Carroll, C.D. and M. S. Kimball. 2005. Liquidity constraints and precautionary saving. Manuscript, Johns Hopkins University. Online. Availeable at: Accessed 31 May 2007.
  8. Carroll, C.D., and A.A. Samwick. 1997. The nature of precautionary wealth. Journal of Monetary Economics 40: 41–71.CrossRefGoogle Scholar
  9. Carroll, C.D., and A.A. Samwick. 1998. How important is precautionary saving? The Review of Economics and Statistics 80: 410–419.CrossRefGoogle Scholar
  10. Drèze, J.H., and F. Modigliani. 1972. Consumption decisions under uncertainty. Journal of Economic Theory 5: 308–335.CrossRefGoogle Scholar
  11. Dynan, K.E. 1993. How prudent are consumers? Journal of Political Economy 101: 1104–1113.CrossRefGoogle Scholar
  12. Engen, E., and J. Gruber. 2001. Unemployment insurance and precautionary saving. Journal of Monetary Economics 47: 545–579.CrossRefGoogle Scholar
  13. Fuchs-Schündeln, N., and M. Schündeln. 2005. Precautionary savings and selfselection: Evidence from the German reunification ‘experiment’. Quarterly Journal of Economics 120: 1085–1220.Google Scholar
  14. Gourinchas, P.-O., and J. Parker. 2002. Consumption over the life cycle. Econometrica 70: 47–89.CrossRefGoogle Scholar
  15. Guiso, L., T. Jappelli, and D. Terlizzese. 1992. Earnings uncertainty and precautionary saving. Journal of Monetary Economics 302: 307–337.CrossRefGoogle Scholar
  16. Huggett, M. 2004. Precautionary wealth accumulation. Review of Economic Studies 71: 769–781.CrossRefGoogle Scholar
  17. Hurst, E., A. Lusardi, A. Kennickell and F. Torralba. 2005. Precautionary savings and the importance of business owners. NBER working paper no. 11731.Google Scholar
  18. Kazarosian, M. 1997. Precautionary savings – a panel study. The Review of Economics and Statistics 79: 241–247.CrossRefGoogle Scholar
  19. Kennickell, A. and A. Lusardi 2005. Disentangling the importance of the precautionary saving motive. Working paper, Dartmouth College.Google Scholar
  20. Kimball, M.S. 1990. Precautionary saving in the small and in the large. Econometrica 58: 53–73.CrossRefGoogle Scholar
  21. Kimball, M.S., C.R. Sahm, and M.D. Shapiro. 2005. Imputing risk tolerance from survey responses. Michigan: University of Michigan.Google Scholar
  22. Kimball, M.S., and P. Weil. 2004. Precautionary saving and consumption smoothing across time and possibilities. Michigan: University of Michigan.Google Scholar
  23. Kreps, D.M., and E.L. Porteus. 1978. Temporal resolution of uncertainty and dynamic choice theory. Econometrica 46: 185–200.CrossRefGoogle Scholar
  24. Laibson, D. 1997. Golden eggs and hyperbolic discounting. Quarterly Journal of Economics 112: 443–477.CrossRefGoogle Scholar
  25. Leland, H.E. 1968. Saving and uncertainty: The precautionary demand for saving. Quarterly Journal of Economics 82: 465–473.CrossRefGoogle Scholar
  26. Low, H., C. Meghir, and L. Pistaferri. 2005. Wage risk and employment over the life cycle. Stanford: Stanford University.Google Scholar
  27. Lusardi, A. 1997. Precautionary saving and subjective earnings variance. Economics Letters 57: 319–326.CrossRefGoogle Scholar
  28. Lusardi, A. 1998. On the importance of the precautionary saving motive. American Economic Review 88: 449–453.Google Scholar
  29. Miller, B.L. 1976. The effect on optimal consumption of increased uncertainty in labor income in the multiperiod case. Journal of Economic Theory 13: 154–167.CrossRefGoogle Scholar
  30. Palumbo, M.G. 1999. Uncertain medical expenses and precautionary saving near the end of the life cycle. Review of Economic Studies 66: 395–421.CrossRefGoogle Scholar
  31. Sibley, D.S. 1975. Permanent and transitory effects of optimal consumption with wage income uncertainty. Journal of Economic Theory 11: 68–82.CrossRefGoogle Scholar
  32. Toché, P. 2005. A tractable model of precautionary saving in continuous time. Economics Letters 87: 267–272.CrossRefGoogle Scholar
  33. Zeldes, S.P. 1989. Optimal consumption with stochastic income: Deviations from certainty equivalence. Quarterly Journal of Economics 104: 275–298.CrossRefGoogle Scholar

Copyright information

© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • Christopher D. Carroll
    • 1
  • Miles S. Kimball
    • 1
  1. 1.