Precautionary Saving in the Small and in the Large

Miles S. Kimball

NBER Working Paper No. 2848
Issued in February 1989
NBER Program(s):   ME

The theory of precautionary saving is shown in this paper to be isomorphic to the Arrow-Pratt theory of risk aversion, making possible the application of a large body of knowledge about risk aversion to precautionary saving, and more generally, to the theory of optimal choice under risk. In particular, a measure of the strength of precautionary saving motive analogous to the Arrow-Pratt measure of risk aversion is used to establish a number of new propositions about precautionary saving, and to give a new interpretation of the Oreze-Modigliani substitution effect.

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Published: Econometrica, vo. 58, no. 1, January 1990.

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