Saving Behavior in a Pure Life-Cycle Model with Income Uncertainty

Abstract

Several models of economic behavior currently compete for an explanation of individual wealth accumulation. However, most focus upon a very limited set of saving motives. In this paper we build a general model of economic behavior, set in a stochastic environment, which incorporates multiple motives and which yields closed form solutions for wealth accumulation and consumption functions. Depending upon the degree of prudence assumed, total private wealth holdings can be attributed to retirement, income uncertainty, lifetime uncertainty and intertemporal substitution motives. The paper then addresses the claims of a number of recent contributions in the area. An exact measure of the equivalent precautionary premium is developed and estimated.