Precautionary saving: A taxonomy of prudence - ScienceDirect Skip to main contentSkip to article - Access through your organization - Purchase PDF Search ScienceDirect ## Economics Letters Volume 150, January 2017, Pages 18-20 # Precautionary saving: A taxonomy of prudence Marcos Vergara Show more Add to Mendeley https://doi.org/10.1016/j.econlet.2016.10.029 Get rights and content ## Highlights • We provide necessary and sufficient conditions on preferences to guarantee a precautionary effect. • We derive a general prudence index. • For the special cases of labor income risk and wealth risk, the general index is reduced to prudence and relative prudence. • For the cases of asset risk and capital risk the general index is reduced to partial prudence. • The precautionary effect arises if the utility premium is decreasing in saving. ## Introduction Precautionary saving is described as the extra saving generated by uncertainty regarding future income. This idea was first studied by Leland (1968) and Sandmo (1970), who showed that a positive third derivative of the utility function is required for positive precautionary saving. This condition is referred to as “pr