Frank M. Fossen, Davud Rostam-Afschar
Various studies have interpreted the positive correlation between income risk and wealth as evidence of significant precautionary savings. However, these high estimates emerged from pooling non-entrepreneurs and entrepreneurs, without controlling for heterogeneity. This article provides evidence for Germany based on representative panel data that includes private wealth balance sheets. Entrepreneurs, who face high income risk, hold more wealth than employees, but this tendency is not due to precautionary motives. Instead, they appear to save more for their old age, because they are usually not covered by statutory pension insurance. The analysis accounts for endogeneity in entrepreneurial choice and heterogeneous risk attitudes.
JEL-Classification: D91;D12;E21
Keywords: precautionary saving, precautionary wealth, entrepreneurship, risk aversion
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