Working Paper 502

Uninsured Idiosyncratic Risk and Aggregate Saving

S. Rao Aiyagari

Revised December 1, 1993

We find that precautionary saving accounts for only a modest (less than 3 percentage point) increase in the aggregate saving rate, at least for moderate and empirically plausible parameter values. This finding is based on a quantitative analysis of a reasonably parameterized version of the standard growth model modified to include a large number of agents who receive uninsured idiosyncratic labor endowment shocks. In contrast to representative agent models, asset trading is quite important to individuals. The model can also account qualitatively for the positive skewness of wealth and income distributions, and significantly greater wealth inequality compared to income inequality.

Published In: Quarterly Journal of Economics (Vol. 109, No. 3, August 1994, pp. 659-684)

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