The surprisingly low importance of income uncertainty for precaution |
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| Institution: | 1. Robert R. and Katheryn A. Dockson Chair in Economics and International Relations, USC and the NBER, United States\n;2. EQC-MPI Chair in the Economics of Disasters, Victoria University of Wellington, New Zealand;1. Robert Day School of Economics and Finance, Claremont McKenna College, Claremont, CA 91711, United States of America;2. Department of Economics, University of California, Berkeley, Berkeley, CA 94720, United States of America;3. Department of Economics, University of Michigan, Ann Arbor, MI 48109, United States of America;4. Department of Economics, Arizona State University, Tempe, AZ 85287, United States of America;5. Haas School of Business, University of California, Berkeley, Berkeley, CA 94720, United States of America;6. NBER, United States of America |
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| Abstract: | While it is common to use income uncertainty to explain household saving decisions, there is much disagreement about the importance of precautionary saving. This paper suggests that income uncertainty is not an important motive for saving, although households do have other precautionary reasons to save. Using a question from the Survey of Consumer Finances that asks how much households want for precautionary purposes, this paper shows that expressed household preferences, and liquid savings, are much lower than predicted by standard modeling assumptions. Households rarely list unemployment as a reason to save. Perceived income uncertainty does not affect liquid savings or precautionary preferences. Neither does being in an occupation with higher income volatility. Instead, households seem very concerned with expenditure shocks. |
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| Keywords: | Income uncertainty Precaution Buffer-stock model Household saving Consumption |
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