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Earnings Uncertainty and Wealth Accumulation

This paper reexamines a recent contribution to the theory of wealth accumulation under income uncertainty by Ricardo Caballero in this Review. First we develop a more general model which generates a richer variety of results and this enables us to place the role of income uncertainty into a more realistic perspective. The second objective is to present Caballero’s model in its correct form, since his presentation is flawed. Third, we examine the use of this model in analyzing the distribution of wealth. We conclude that, regardless of the type of uncertainty considered, the intertemporal substitution motive for saving is of major importance.