Income risk, precautionary saving, and loss aversion: An empirical test
| Autor: | Ibanez, Marcela, Schneider, Sebastian O. |
|---|---|
| Rok vydání: | 2023 |
| Předmět: |
consumption plans
D81 - Criteria for Decision-Making under Risk and Uncertainty precautionary savings experiment D14 - Household Saving Personal Finance J65 Reference-dependent utility Bogotá J65 - Unemployment Insurance Severance Pay Plant Closings risk preferences O16 D90 - General D81 loss aversion Theory [D11 - Consumer Economics] D90 ddc:330 income risk D14 low-income D15 O16 - Financial Markets Saving and Capital Investment Corporate Finance and Governance G40 D11 expectations |
| Popis: | This paper empirically examines the behavioral precautionary saving hypothesis that uncertainty about future income triggers an increase in saving because of loss aversion. Guided by the theoretical model of Koszegi and Rabin (2009), we first extend their theoretical analysis to also consider the internal margin, i.e., the strength, of loss aversion, and then empirically study the relation between income risk, experimentally elicited loss aversion, and precautionary savings. We do so using a sample of 640 individuals from the low-income population of Bogotá, characterized by limited financial education and subject to substantial income risk. In line with the theoretical predictions, we find that an increase in income risk is associated with higher savings for loss-averse individuals, and that this increase in savings grows with the degree of loss aversion. An accompanying laboratory experiment confirms that an exogenous increase in income risk causally leads to this observed pattern. Thus, consistent with the theoretical predictions derived from the model of Koszegi and Rabin (2009), but in contrast to common assumptions, our findings establish that loss aversion is not necessarily an obstacle to saving, and thus identify new approaches of increasing saving among individuals with low financial education. |
| Databáze: | OpenAIRE |
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