Subjective income risk and precautionary saving

Abstract

While economists agree that prudent households save to hedge subjective risk in income, they still debate the relevance of precautionary saving. The main problem in estimating this saving motive is the lack of micro data on perceived income risk, preferences, trade opportunities, and its potential bias effects. In the present work we overcome this problem by exploiting a wave of the Italian Survey on Household Income and Wealth that contains unique information on households’: perceived income risk, risk aversion, patience, saving attitudes, liquidity and credit constraints. Results robustly indicate that precautionary saving is significant but low: an average of 4%–6% of households’ total net wealth. Data richness is used to produce a detailed analysis of the omission-variable bias discussed in earlier studies; both highlighting differences in signs and significance. Finally, we extend our analysis to group heterogeneity, with regard to precautionary saving of business owners and senior citizens.