Precautionary saving and risk preferences

Previous models of precautionary saving have used expected utility in which relative risk aversion is constrained to be the inverse of the elasticity of intertemporal substitution. Kreps-Porteus preferences generalize expected utility by allowing independent parameters that govern risk aversion and intertemporal substitution. In the first chapter, I construct a dynamic programming problem for a finitely-lived consumer to find that optimal consumption is decreasing in both risk aversion and the elasticity of intertemporal substitution, a finding inconsistent with the commonly used expected utility model.;In the second chapter, I measure the significance precautionary saving among Japanese households using the Japanese Panel Study of Consumers. I estimate the significance precautionary saving among Japanese households from 1993--1999 and find that those who report that precautionary motives are an important motivation to save have the strongest correlation between measures of both permanent and transitory income volatility on one hand and wealth on the other hand. Secondly, I find that the baseline predictions of the model are robust across different assumptions about the underlying income process of Japanese households.;In the third chapter, I examine the relationship between borrowing constraints and the marginal propensity to consume. Available evidence suggests that the average marginal propensity to consume for the 2001 tax rebate in the US was not nearly as large as that from previous tax breaks. This paper offers an explanation of why we should expect this by proposing the hypothesis that the availability of credit cards in the US has eased borrowing constraints for the average consumer, which in turn implies that the predicted average marginal propensity to consume will fall in the proposed model. I find that the average marginal propensity of consume decreases as borrowing capacity increases, risk aversion increases and the elasticity of intertemporal substitution decreases. If consumers in fact have a smaller marginal propensity to consume today than they did a generation ago due to easier credit, one should expect that a smaller amount of a tax rebate would be spent on additional consumption.