Precautionary and Entrepreneurial Savings: New Evidence from German Households

Authors


  • The authors thank Johannes Geyer, Michal Myck, Viktor Steiner, the anonymous referees, the editor, and participants at the 2010 Warsaw International Economic Meeting, the 2010 Annual Conference of the German Economic Association in Kiel, and the joint Economic Policy Seminar of DIW Berlin and Freie Universität Berlin in 2009, for valuable comments and suggestions. Financial support from the German Research Foundation (DFG) for the project ‘Tax Policy and Entrepreneurial Choice’ (STE 681/7-1) is gratefully acknowledged. The usual disclaimer applies.

Abstract

Various studies interpret the positive correlation between income risk and wealth as evidence of significant precautionary savings. However, these high estimates emerge 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 because of 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.

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