NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

How Important is Precautionary Saving?

Christopher D. Carroll, Andrew A. Samwick

NBER Working Paper No. 5194
Issued in July 1995
NBER Program(s):   AG   EFG   PE

We estimate the fraction of the wealth of a sample of PSID respondents that is held because some households face greater income uncertainty than others. We first derive an equation characterizing the theoretical relationship between wealth and uncertainty in a buffer-stock model of saving. Next, we estimate that equation using PSID data; we find strong evidence that households engage in precautionary saving. Finally, we simulate the wealth distribution that would prevail if all households had the same uncertainty as the lowest-uncertainty group. We find that between 39 and 46 percent of wealth in our sample is attributable to uncertainty differentials across groups.

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Document Object Identifier (DOI): 10.3386/w5194

Published: Review of Economics and Statistics, Vol. 80, no. 3 (1998): 410-419.

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