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Abstract:
The literature on asset accumulation by households draws a sharp distinction
between "short-run" precautionary motives to buffer annual consumption from
annual labor income shocks, and "long-run" life cycle considerations under
labor income certainty. However, empirical estimates of the persistence of
shocks to annual incomes imply that households are subject to considerable
career uncertainty. We study long-run precautionary motives for life-cycle
wealth accumulation and portfolio choice. We compute optimal portfolios under
three sources of uncertainty (stock returns, incomes, and lifespan), and
explore the separate contributions of several key factors for mean and median
asset holdings, including education, risk aversion, household heterogeneity,
utility from bequests, time preference, and variance and serial correlation of
income shocks. Numerical solutions for households in three education groups
are compared with data from the most recent and comprehensive source, the 1992
Survey of Consumer Finances.
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