EARNINGS UNCERTAINTY AND PRECAUTIONARY SAVING

We test for the presence of precautionary saving using a self-reported measure of earnings uncertainty drawn from the 1989 Italian Survey of Household Income and Wealth. The effect of uncertainty on wealth accumulation is consistent with the theory of precautionary saving and with decreasing prudence, but explains only a small fraction of saving. The results cast doubts on the empirical relevance of precautionary saving in response to earnings uncertainty, but are not in contrast with the importance of the precautionary motive per se. Beside earnings uncertainty, other risks, such as health and mortality, may be important determinants of wealth accumulation.