Income Uncertainty, Liquidity Constraints, and the Option Value of Saving PDF Download
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Author: Cristiń Echeverría
Publisher:
ISBN:
Category :
Languages : en
Pages : 202
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Book Description
Author: Cristiń Echeverría
Publisher:
ISBN:
Category :
Languages : en
Pages : 202
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Book Description
Author: Angus Deaton
Publisher:
ISBN:
Category : Consumption (Economics)
Languages : en
Pages : 38
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Book Description
Author: Makoto Saito
Publisher:
ISBN:
Category : Risk
Languages : en
Pages : 36
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Book Description
Author: Chris Carroll
Publisher:
ISBN:
Category : Economics
Languages : en
Pages : 40
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Book Description
Economists working with numerical solutions to the optimal consumption/saving problem under uncertainty have long known that there are quantitatively important interactions between liquidity constraints and precautionary saving behavior. This paper provides the analytical basis for those interactions. First, we explain why the introduction of a liquidity constraint increases the precautionary saving motive around levels of wealth where the constraint becomes binding. Second, we provide a rigorous basis for the oft-noted similarity between the effects of introducing uncertainty and introducing constraints, by showing that in both cases the effects spring from the concavity in the consumption function which either uncertainty or constraints can induce. We further show that consumption function concavity, once created, propagates back to consumption functions in prior periods. Finally, our most surprising result is that the introduction of additional constraints beyond the first one, or the introduction of additional risks beyond a first risk, can actually reduce the precautionary saving motive, because the new constraint or risk can hide' the effects of the preexisting constraints or risks
Author: Chris Carroll
Publisher:
ISBN:
Category : Economic security
Languages : en
Pages : 70
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Book Description
We estimate the fraction of the wealth of a sample of PSID respondents that is held because some households face greater income uncertainty than others. We first derive an equation characterizing the theoretical relationship between wealth and uncertainty in a buffer-stock model of saving. Next, we estimate that equation using PSID data; we find strong evidence that households engage in precautionary saving. Finally, we simulate the wealth distribution that would prevail if all households had the same uncertainty as the lowest-uncertainty group. We find that between 39 and 46 percent of wealth in our sample is attributable to uncertainty differentials across groups.
Author: Luigi Guiso
Publisher:
ISBN:
Category : Investments
Languages : en
Pages : 56
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Author: Patrick Bolton
Publisher:
ISBN:
Category :
Languages : en
Pages : 0
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Book Description
We develop an integrated theory of investment, seasoned equity offerings (SEOs), liquidation, and corporate savings under uncertainty for a financially constrained firm, which features endogenous growth options, abandonment options, and payout policies. Facing costly external financing, the firm prefers to fund its investment internally, so that its optimal policies and value depend on both its earnings fundamentals and liquidity holdings. The firm values not only real flexibility but also financial flexibility. The interaction of real and financial flexibility generates novel real options results: (1) Limited financial slack significantly erodes the value of growth & abandonment options; (2) Firms prefer projects with front-loaded cash-flows; (3) The firm's incentive to forgo costly external financing and to accumulate internal funds may cause substantial delay in investment; (4) A financially constrained firm over-invests in early stages of its life-cycle in an effort to quickly build up its cash-flow generating capacity; (5) SEOs are driven by both firm survival and growth motives. A firm in the mature phase may find itself in three mutually exclusive regions: payout, inaction, and liquidation. A firm in its growth phase may find itself in two additional regions: a region where investment is partly financed with an SEO and a region where investment is solely financed with internal funds. These regions depend on both firm savings and earnings fundamentals.
Author: Ian Irvine
Publisher: Department of Economics, Concordia University
ISBN:
Category : Finance, Personal
Languages : en
Pages : 38
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Book Description
Author: Chris Carroll
Publisher:
ISBN:
Category : Consumption (Economics)
Languages : en
Pages : 76
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Book Description
This paper uses the Panel Study of Income Dynamics to provide some of the first direct evidence that wealth is systematically higher for consumers with greater income uncertainty. However, the apparent pattern of precautionary saving is not consistent with a standard parameterization of the life cycle model in which consumers are patient enough to begin saving for retirement early in life: wealth is estimated to be less sensitive to uncertainty in permanent income than implied by that model. Instead, our results suggest that over most of their working lifetime, consumers behave in accordance with the 'buffer-stock' models of saving described in Carroll (1992) or Deaton (1991), in which consumers hold wealth principally to insulate consumption against near term fluctuations in income.
Author: Patrick Bolton
Publisher:
ISBN:
Category : Investments
Languages : en
Pages : 47
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Book Description
We develop a model of investment timing under uncertainty for a financially constrained firm. Facing external financing costs, the firm prefers to fund its investment through internal funds, so that the firm's optimal investment policy and value depend on both its earnings fundamentals and liquidity holdings. We show that financial constraints significantly alter the standard real options results, with the financial flexibility conferred by internal funds acting as a complement, and at times as a substitute, to the real flexibility given by the optimal timing of investment. We show that: 1) the investment hurdle is highly nonlinear and non-monotonic in the firm's internal funds; 2) in contrast to predictions implied by standard corporate savings models, a financially constrained firm may behave in a risk seeking sense (and thus firm value may be convex in liquidity) due to the interaction between financial and real (growth/abandonment) flexibility; 3) with multiple rounds of growth options, a value-maximizing financially constrained firm may choose to over-invest via accelerated investment timing in earlier stages in order to mitigate under-investment problems in later stages.
