Risky Income, Life Cycle Consumption, and Precautionary Savings / Jonathan S. Skinner.

Format:

Book

Author/Creator:

Skinner, Jonathan S.

Contributor:

National Bureau of Economic Research.

Series:

Working Paper Series (National Bureau of Economic Research) no. w2336.

NBER working paper series no. w2336

Language:

English

Subjects (All):

Consumption (Economics).

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1987.

Cambridge, Mass : National Bureau of Economic Research, 1987.

Summary:

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.

Notes:

Print version record

August 1987.