Marginal Utility Shocks and the Precautionary Saving Puzzle

This paper introduces a novel mechanism linking wealth accumulation to shocks in
marginal utility rather than income alone. In contrast to the Bewley–Aiyagari–Huggett
(BAH) framework, where savings eventually decline with wealth, I show that when
households face idiosyncratic longevity shocks that alter the continuation value of utility, saving can remain strictly positive above some threshold. The model predicts that
maintaining marginal utility becomes a luxury relative to consumption, inducing precautionary saving even among the wealthy. Using Health and Retirement Study (HRS)
data on U.S. couples aged 55–65, I document that saving and saving rates rise with
wealth, contrary to BAH predictions. Calibrating the model with health and income
transitions, I find that the mechanism accounts for more than one-quarter of observed
average savings. The results imply that precautionary motives, rather than bequest or
return heterogeneity, drive much of the saving behavior at the top of the wealth distribution.