Increase in risk and saving behavior
Journal
Journal of Economics and Business
Journal Volume
56
Journal Issue
5
Pages
405-414
Date Issued
2004
Author(s)
Wang J.-H.
Abstract
This paper extends the traditional unambiguous comparative statics analysis of an increase in risk into the case where individual's utility is a function of two goods rather than of a payoff only. Specifically, we use saving behavior to demonstrate the application of the extension. We find that a first-order stochastic dominance of rate of return causes a nonsatiable and risk-averse borrower to increase his borrowing. A mean-preserving second-order stochastic dominance of rate of return causes a borrower, who is risk-averse and prudent, to decrease his borrowing. Furthermore, we find that a stronger central risk dominance leads a nonsatiable and risk-averse lender to decrease his saving. Last, for the mean-preserving CDF shifts, we give a necessary and sufficient condition for all risk-averse lenders (respectively, borrowers) to decrease their saving (respectively, borrowing). ? 2004 Elsevier Inc. All rights reserved.
Subjects
Central risk dominance
Increase in risk
Saving
Stochastic dominance
Type
journal article