On the precautionary motive for savings and prudence in the rank-dependent utility framework

Abstract

International audienceIn this paper, we deal with the basic two-period consumption–saving problem where the first- and second-period consumption utilities, v and u, are assumed to be concave, respectively, as usually. We prove that for the rank-dependent utility model, prudence is fully characterized by the convexity of u′ and strong pessimism. The paper ends by showing that for a strong risk-averse RDU decision-maker, strict pessimism allows local weak prudence, whatever the sign of u′′′, whereas for a strong risk-averse EU decision-maker local weak prudence cannot be disentangled from prudence