Unemployment Risk and Precautionary Wealth: Evidence from Households' Balance Sheets

This paper examines precautionary behavior by relating job-loss risk to household net worth. We use existing best practice and some new strategies to deal with some problematic issues inherent in this literature regarding proxying uncertainty, instrumentation, and incorporating theoretical restricti...

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Bibliographic Details
Published in:The review of economics and statistics 2003-08, Vol.85 (3), p.586-604
Main Authors: Carroll, Christopher D., Dynan, Karen E., Krane, Spencer D.
Format: Article
Language:English
Subjects:
Economic models
Economic theory
Family income
Households
Housing
Income distribution
Income estimates
Job loss
Net worth
Precautionary savings
Risk
Risk aversion
Self employment
Studies
Unemployment
Wealth
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Summary:This paper examines precautionary behavior by relating job-loss risk to household net worth. We use existing best practice and some new strategies to deal with some problematic issues inherent in this literature regarding proxying uncertainty, instrumentation, and incorporating theoretical restrictions. We do not find precautionary variation in the wealth holdings of households with low permanent income, but do find precautionary effects for moderate and higher-income households. When the dependent variable is total net worth, these findings are robust to several alternative specifications. But we do not find precautionary responses in subaggregates of wealth that exclude home equity.
ISSN:0034-6535
1530-9142
DOI:10.1162/003465303322369740