This article analyzes the effect of labor income risk on the joint saving/portfolio-composition problem. Given decreasing absolute prudence, we find that even when labor income risk increases overall saving, it tends to lower investment in a risky asset. Applying the theory to public finance, we...

This paper introduces the concept of standard risk aversion. A von Neumann-Morgenstern utility function has standard risk aversion if every risk that has a negative interaction with a small reduction in wealth also has a negative interaction with any undesirable, independent risk. It is shown...

This paper analyzes the effects of government debt and income taxes on consumption and saving in a world of infinitely-lived households having uncertain and heterogeneous incomes. The special structure of the model allows exact aggregation across households despite incomplete markets. The...

This paper constructs a dynamic macroeconomic model with less-than-perfect price flexibility which has a classical side consistent with real business cycle theory, augmented by investment adjustment costs; increasing returns to scale; and a new, flexible formalization of imperfect competition....

The theory of precautionary saving is shown to be isomorphic to the Arrow-Pratt theory of risk aversion, making possible the application of a large body of knowledge about risk aversion to precautionary saving--and more generally, to the theory of optimal choice under risk. In particular, a...