HOW PRUDENT ARE CONSUMERS

Using data from the Consumer Expenditure Survey, this paper presents a simple test that provides an explicit estimate of the parameter in th e utility function that reflects the strength of the precautionary sav ing motive, the coefficient of relative prudence. The test yields a fa irly precise estimate of a small precautionary motive; in fact, the es timate is too small to be consistent with widely accepted beliefs abou t risk aversion. The presence of liquidity-constrained households does not appear to explain this finding, and there is some evidence that s elf-selection of households into risky environments also cannot explai n the results.