Buffer stocks and precautionary savings with loss aversion

Joshua Aizenman

Research output: Contribution to journalArticlepeer-review

21 Scopus citations

Abstract

This paper reexamines buffer stocks and precautionary savings in the presence of loss aversion. We assume that agents are disappointment averse, as in Gul [Econometrica, 59 (1991) 667-686]. We show that the concavity of the marginal utility continues to determine precautionary saving, but its effect is of a second order magnitude (proportional to the square of the coefficient of variation) compared to the first order effect (proportional to the coefficient of variation) induced by loss aversion. We show that a stabilization fund that is rather small when agents are maximizing the conventional expected utility, turns out to be rather large with loss aversion.

Original languageEnglish
Pages (from-to)931-947
Number of pages17
JournalJournal of International Money and Finance
Volume17
Issue number6
DOIs
StatePublished - 1 Dec 1998
Externally publishedYes

Keywords

  • Buffer stocks
  • E21
  • F39
  • Loss aversion
  • O16
  • Precautionary saving
  • Reference point

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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