Precautionary Saving and Accidental Bequests

Abstract

This paper presents a simple general equilibrium model of precautionary saving and accidental bequests. This model is used to analyze the implications of individual life- time uncertainty for aggregate consumption and capital accumulation. A precautionary demand for saving arises because an individual consumer does not know in advance the date at which he will die, and he wants to avoid low levels of consumption in the event that he lives longer than expected. An implication of this precautionary saving is that when death does occur, the consumer is generally holding some wealth, which is then passed on to his heirs in the form of an accidental bequest. Even if all consumers have the same ex ante mortality probabilities, there will be some intracohort variation in the date of death; consequently there will be a nondegenerate distribution of bequests left by consumers in a cohort. This nondegen- erate distribution of bequests left by one generation induces variation in the distributions of wealth, consumption, and bequests of subsequent generations.

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