TY - JOUR AU - Hurst,Erik AU - Kennickell,Arthur AU - Lusardi,Annamaria AU - Torralba,Francisco TI - Precautionary Savings and the Importance of Business Owners JF - National Bureau of Economic Research Working Paper Series VL - No. 11731 PY - 2005 Y2 - November 2005 UR - http://www.nber.org/papers/w11731 L1 - http://www.nber.org/papers/w11731.pdf N1 - Author contact info: Erik Hurst Booth School of Business University of Chicago Harper Center Chicago, IL 60637 Tel: 773/834-4073 Fax: 773/702-0458 E-Mail: erik.hurst@chicagobooth.edu Arthur Kennickell Board of Governors Federal Reserve Board Washington, DC 20551 Tel: 202/452-2247 Fax: 202/452-5295 E-Mail: arthur.kennickell@frb.gov Annamaria Lusardi The George Washington University School of Business 2201 G Street, NW Duques Hall, Suite 450E Washington, DC 20052 Tel: 202-994-8410 E-Mail: alusardi@gwu.edu Francisco Torralba University of Chicago E-Mail: ftorralb@uchicago.edu AB - In this paper, we show the pivotal role business owners play in estimating the importance of the precautionary saving motive. Since business owners hold larger amounts of wealth than other households for non-precautionary reasons and also face highly volatile income, they induce a correlation between wealth and income risk regardless of whether or not a precautionary saving motive exists. Using data from the Panel Study of Income Dynamics in the 1980s and the 1990s, we show that among both business owners and non-business owners, the size of precautionary savings with respect to labor income risk is modest and accounts for less than ten percent of total household wealth. However, pooling together the two groups leads to an artificially high estimate of the importance of precautionary savings. New data from the Survey of Consumer Finances further confirms that precautionary savings account for less than ten percent of total wealth for both business owners and non-business owners. Thus, while a precautionary saving motive exists and affects all households, it does not give rise to high amounts of wealth in the economy, particularly among those households who face the most volatile stream of income. ER -