Working Paper: NBER ID: w11731
Authors: Erik Hurst; Annamaria Lusardi; Arthur Kennickell; Francisco Torralba
Abstract: In this paper, we show the pivotal role business owners play in estimating the importance of the precautionary saving motive. Since business owners hold larger amounts of wealth than other households for non-precautionary reasons and also face highly volatile income, they induce a correlation between wealth and income risk regardless of whether or not a precautionary saving motive exists. Using data from the Panel Study of Income Dynamics in the 1980s and the 1990s, we show that among both business owners and non-business owners, the size of precautionary savings with respect to labor income risk is modest and accounts for less than ten percent of total household wealth. However, pooling together the two groups leads to an artificially high estimate of the importance of precautionary savings. New data from the Survey of Consumer Finances further confirms that precautionary savings account for less than ten percent of total wealth for both business owners and non-business owners. Thus, while a precautionary saving motive exists and affects all households, it does not give rise to high amounts of wealth in the economy, particularly among those households who face the most volatile stream of income.
Keywords: No keywords provided
JEL Codes: E2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Pooling business owners with non-business owners (J54) | Inflated estimates of precautionary savings (E21) |
| Labor income risk (J39) | Wealth accumulation (E21) |
| Business owners face higher income risk (D33) | Hold more wealth for reasons unrelated to precautionary savings (E21) |
| Precautionary savings (D14) | Total wealth among non-business owners (D14) |
| Precautionary savings (D14) | Total wealth among business owners (P12) |
| Inclusion of business owners in the sample (L26) | Estimates of precautionary savings (E21) |