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Uninsured Idiosyncratic Risk and Aggregate Saving

Working Paper 502 | Published December 1, 1993

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Uninsured Idiosyncratic Risk and Aggregate Saving


We find that precautionary saving accounts for only a modest (less than 3 percentage point) increase in the aggregate saving rate, at least for moderate and empirically plausible parameter values. This finding is based on a quantitative analysis of a reasonably parameterized version of the standard growth model modified to include a large number of agents who receive uninsured idiosyncratic labor endowment shocks. In contrast to representative agent models, asset trading is quite important to individuals. The model can also account qualitatively for the positive skewness of wealth and income distributions, and significantly greater wealth inequality compared to income inequality.

Published in: _Quarterly Journal of Economics_ (Vol. 109, No. 3, August 1994, pp. 659-684),