How Changing Prudence and Risk Aversion Affect Optimal Saving
CESifo, Munich, 2008
CESifo Working Paper No. 2438
We show how optimal saving in a two-period model is affected when prudence and risk aversion of the underlying utility function change. Increasing prudence alone will induce higher savings only if, for certain combinations of the interest rate and the pure time discount rate, there is distributional neutrality between the two periods. Otherwise, changes of risk aversion that affect the distribution between the periods must also be taken into account.
Public Choice