Recursive Utility, Precautionary Saving and the Demand for Insurance

We consider in this paper the interaction between precautionary savings and insurance demand. Under the standard intertemporal expected utility framework, the effect of an increase in the concavity of the utility function is ambiguous because of the inability of this framework to distinguish between the resistance to intertemporal substitution and risk aversion. Using Kreps-Porteus preferences, we show that an increase in the resistance to intertemporal substitution has an unambiguous effect on saving. If risk aversion is decreasing, it also yields an unambiguous effect on insurance demand. We also compare the two types of preference ordering in term of the optimal saving and insurance strategy.