Using data from the Consumer Expenditure Survey, this paper presents a simple test that provides an explicit estimate of the parameter in the utility function that reflects the strength of the precautionary saving motive, the coefficient of relative prudence. The test yields a fairly precise estimate of a small precautionary motive; in fact, the estimate is too small to be consistent with widely accepted beliefs about risk aversion. The presence of liquidity-constrained households does not appear to explain this finding, and there is some evidence that self-selection of households into risky environments also cannot explain the results.

This paper tests for the presence of habit formation using household data. A simple model of habit formation implies a condition relating the strength of habits to the evolution of consumption over time. When the condition is estimated with food consumption data from the Panel Study on Income Dynamics (PSID), the results yield no evidence of habit formation at the annual frequency. This finding is robust to a number of changes in the specification. It also holds for several proxies for nondurables and services consumption created by combining PSID variables with weights estimated from Consumer Expenditure Survey data.

Using data from the Consumer Expenditure Survey, this paper presents a simple test that provides an explicit estimate of the parameter in the utility function that reflects the strength of the precautionary saving motive, the coefficient of relative prudence. The test yields a fairly precise estimate of a small precautionary motive; in fact, the estimate is too small to be consistent with widely accepted beliefs about risk aversion. The presence of liquidity-constrained households does not appear to explain this finding and there is some evidence that self-selection of households into risky environments also cannot explain the results.

In this short paper we take a first look at the question of whether the increasing income inequality that the US has witnessed in the past 25 years has generated increasing unhappiness in those who have been falling behind, despite their real income has risen markedly. If an individual's utility depends not only on the level of her own consumption but also on how that level compares with the consumption of others, then the observed widening of the income distribution may have implications for the happiness of different groups that go beyond those associated with the changes in their respective incomes. We find that people's happiness appears to depend positively on how well their socio-economic group is doing relative to the average in their geographic area, even after controlling for the level of their own income. In addition, we find some evidence that the relationship is much stronger for people whose group has above-average income than for people whose group has below-average income; it would thus appear that relative concerns do not become an issue until a person has attained a certain place within the income distribution.

The Effects of Population Aging on the Relationship among Aggregate Consumption, Saving, and Income by Karen E. Dynan, Wendy Edelberg and Michael G. Palumbo. Published in volume 99, issue 2, pages 380-86 of American Economic Review, May 2009

This paper examines precautionary behavior by relating job-loss risk to household net worth. We use existing best practice and some new strategies to deal with some problematic issues inherent in this literature regarding proxying uncertainty, instrumentation, and incorporating theoretical restrictions. We do not find precautionary variation in the wealth holdings of households with low permanent income, but do find precautionary effects for moderate and higher-income households. When the dependent variable is total net worth, these findings are robust to several alternative specifications. But we do not find precautionary responses in subaggregates of wealth that exclude home equity.

The Importance of Bequests and Life-Cycle Saving in Capital Accumulation: A New Answer by Karen E. Dynan, Jonathan Skinner and Stephen P. Zeldes. Published in volume 92, issue 2, pages 274-278 of American Economic Review, May 2002

The question of whether higherlifetime income households save a larger fraction of their income was the subject of much debate in the 1950s and 1960s, and while not resolved, it remains central to the evaluation of tax and macroeconomic policies. We resolve this long-standing question using new empirical methods applied to the Panel Study of Income Dynamics, the Survey of Consumer Finances, and the Consumer Expenditure Survey. We find a strong positive relationship between saving rates and lifetime income and a weaker but still positive relationship between the marginal propensity to save and lifetime income. There is little support for theories that seek to explain these positive correlations by relying solely on time preference rates, nonhomothetic preferences, or variations in Social Security benefits. There is more support for models emphasizing uncertainty with respect to income and health expenses, bequest motives, and asset-based means testing or behavioral factors causing minimal saving rates among low-income households.