On the precautionary motive for savings and prudence in the rank-dependent utility framework

Journal article: In this paper, we deal with the basic two-period consumption–saving problem where the first- and second-period consumption utilities, v and u, are assumed to be concave, respectively, as usually. We prove that for the rank-dependent utility model, prudence is fully characterized by the convexity of u′ and strong pessimism. The paper ends by showing that for a strong risk-averse RDU decision-maker, strict pessimism allows local weak prudence, whatever the sign of u′′′, whereas for a strong risk-averse EU decision-maker local weak prudence cannot be disentangled from prudence.

Author(s)

Alain Chateauneuf, Ghizlane Lakhnati, Eric Langlais

Journal
  • Economic Theory
Date of publication
  • 2016
Keywords
  • Prudence
  • Local weak prudence
  • RDU model
  • Strong risk aversion
  • Pessimism
Pages
  • 169-182
Version
  • 1
Volume
  • 61