Precautionary savings and wealth distribution under habit formation preferences Articles uri icon

publication date

  • September 2013

start page

  • 1257

end page

  • 1291

issue

  • 6

volume

  • 50

International Standard Serial Number (ISSN)

  • 0304-3932

Electronic International Standard Serial Number (EISSN)

  • 1873-1295

abstract

  • We study the role of habit formation in shaping the amount of precautionary savings and the wealth distribution in heterogeneous agents model economies with idiosyncratic uncertainty. We adjust preferences to equate the Intertemporal Elasticity of Substitution in all model economies. We find that habit formation brings a hefty increase in precautionary savings and very mild reductions in the coefficient of variation and in the Gini index of wealth. These findings hold for both persistent and non-persistent habits, with the effects of the former being much larger

keywords

  • habit formation; precautionary savings; wealth distribution