A note on the relevance of prudence in precautionary saving.

Abstract

The aim of this note is to suggest that prudence, i.e. convexity of marginal utility, can only explain a small share of precautionary savings, which we may define as savings generated by variance in income. Therefore, if we are willing to admit that precautionary savings constitute a sizable share of total savings, other factors should be called for. We present a few examples showing that risk aversion might constitute one such factor.