Prudence, Intertemporal Substitution, and Savings under Uncertainty

This paper derives the relations between the coefficient of absolute prudence, the equivalent precautionary premium, risk aversion to concentration, and the normality and shift of current consumption under uncertainty, without the time-separable utility assumption. Examples show that Kimball's coefficient of absolute prudence does not fully characterize precautionary saving or saving behavior under uncertainty. It is proved that, whereas a higher rate of intertemporal substitution and a larger coefficient of absolute prudence imply more savings when current consumption is normal, a larger coefficient of intertemporal substitution and a smaller coefficient of absolute prudence imply more savings when current consumption is inferior. Received July 17, 2001; revised version received November 20, 2001