TY - JOUR AU - Skinner, Jonathan S TI - Risky Income, Life Cycle Consumption, and Precautionary Savings JF - National Bureau of Economic Research Working Paper Series VL - No. 2336 PY - 1987 Y2 - August 1987 DO - 10.3386/w2336 UR - http://www.nber.org/papers/w2336 L1 - http://www.nber.org/papers/w2336.pdf N1 - Author contact info: Jonathan S. Skinner Department of Economics 6106 Rockefeller Hall Dartmouth College Hanover, NH 03755 Tel: 603/646-2535 Fax: 603/646-2122 E-Mail: jonathan.skinner@dartmouth.edu AB - This paper argues that precautionary savings against uncertain income comprise a large fraction of aggregate savings. A closed-form approximation for life cycle consumption subject to uncertain interest rates and earnings is derived by taking a second-order Taylor-Series approximation of the Euler equations. Using empirical measures of income uncertainty, I find that precautionary savings comprises up to 56 percent of aggregate life cycle savings. The derived expression for n-period optimal consumption is easily implemented for econometric estimation, and accords well with the exact numerical solution. Empirical comparisons of savings patterns among occupational groups using the Consumer Expenditure Survey contradict the predictions of the life cycle model. Riskier occupations, such as the self-employed and salespersons, save less than other occupations, although this finding may in part reflect unobservable differences in risk aversion among occupations. ER -