We study a two-period saving model where theagent’s future income might be ambiguous. Our agent has a version of the smoothambiguity decision criterion (Klibano, Marinacci and Mukerji (2005)), where theagent’s perception about ambiguity is described by a second-order belief overfirst-order risks. We model increasing ambiguity as a spreading-out of thesecond-order belief. We show that under a “Risk Comonotonicity” condition, ouragent saves more when ambiguity in future income increases. We argue that thecondition is indispensable for our result.
Precautionary Saving, Smooth Ambiguity, Increasing Ambiguity, Risk Comonotonicity, Informativeness
Singapore Management University
City or Country
KAJII, Atsushi and Jingyi XUE.
Precautionary Saving with Changing Income Ambiguity. (2016). 1-10. Research Collection School Of Economics.
Available at: http://ink.library.smu.edu.sg/soe_research/1905
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