Three essays on precautionary saving consumption decisions.

Summary In this thesis, I examine the effect of uncertainty on consumption behavior in life cycle models. Although it has been recognized since the 1980s that uncertainty can substantially alter the predictions of life cycle models, some of the mechanisms involved are still poorly understood. In Chapter 1, I study the consequences of the presence of uncertainty on consumption growth, and I show that they challenge the existing belief that consumption follows a random walk in standard life cycle models. Indeed, uncertainty leads prudent households (i.e. those with convex marginal utility) to reallocate part of their present consumption to the future, which is uncertain, and thus to choose a level of present consumption lower than their expected future consumption. This implies that variables other than present consumption improve the prediction of future consumption, as they predict the precautionary difference between present and future consumption. In chapter 2, I consider the impact of uncertainty on the level of consumption of households, how it varies with their income and wealth, and thus how their consumption responds to income shocks. Since the presence of uncertainty induces households to allocate a larger share of their resources to future periods, they save more in the present period. I highlight the fact that this additional saving, called precautionary saving, varies in a decreasing and concave manner with the transitory share of income and with wealth, but in an increasing and convex manner with the permanent share of income. In chapter 3, I draw the consequences of these results for the empirical measurement of the response of consumption to income shocks. I build on the results of Chapters 1 and 2 to show that, in standard life-cycle models, consumption growth is negatively correlated with the realizations of past transitory shocks, due to precautionary behavior. Such a correlation would induce a bias in a frequently used method for estimating the response of consumption to transitory income shocks, developed by Blundell, Pistaferri and Preston (2008). Indeed, their method would attribute to present transitory shocks the changes in consumption explained by past shocks, thus predicting a too small response to transitory shocks. I generalize this method to take into account the possible influence of past shocks on consumption growth. With this more flexible estimator, I obtain that the response of consumption to transitory shocks is statistically significant and that its magnitude is consistent with the literature on the response of consumption to transitory tax cuts.