Dynastic Precautionary Savings

This paper provides evidence that parents accumulate savings to insure their children against income risk. I refer to this behavior as dynastic precautionary saving and quantify its extent using matched parent-child pairs from the Panel Study of Income Dynamics and exploiting variation in income risk across age, industries and occupations. I then build a model of altruistically linked overlapping generations, in which parents and children interact strategically, that is quantitatively consistent with the empirical evidence. I argue that strategic interactions are important for generating the observed dynastic precautionary behavior and use the model to show this component of household savings is quantitatively important for wealth accumulation, intergenerational transfers and consumption insurance.