Precautionary Saving with Changing Income Ambiguity

• Main Authors: KAJII, Atsushi, Jingyi XUE
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2016
• Subjects: Precautionary Saving; Smooth Ambiguity; Increasing Ambiguity; Risk Comonotonicity; Informativeness; Economic Theory
• Online Access: https://ink.library.smu.edu.sg/soe_research/1905; https://ink.library.smu.edu.sg/context/soe_research/article/2904/viewcontent/Precautionary_saving_with_changing_income_ambiguity.pdf
• Institution: Singapore Management University

We study a two-period saving model where theagent’s future income might be ambiguous. Our agent has a version of the smoothambiguity decision criterion (Klibano, Marinacci and Mukerji (2005)), where theagent’s perception about ambiguity is described by a second-order belief overfirst-order risks. We model increasing ambiguity as a spreading-out of thesecond-order belief. We show that under a “Risk Comonotonicity” condition, ouragent saves more when ambiguity in future income increases. We argue that thecondition is indispensable for our result.