Income volatility and saving decisions: Experimental evidence

Abstract

Around the world, it is becoming increasingly common for individuals to have volatile incomes. Previous research offers mixed evidence on whether uncertainty about one’s income may increase or decrease saving behaviour. Across four incentivised online experiments (N = 712), we examine the relationship between income volatility and saving behaviour in a novel financial decision making task. In this task, participants receive hypothetical income that is either consistent or that varies to different degrees. We capture participants’ perceptions of how volatile their income is and observe how this influences their decision to spend the income or save it towards a hypothetical impending emergency. Our results indicate that receiving a more volatile income, as measured by its coefficient of variation (CV), leads to higher savings within our task. However, there appears to be a threshold level of volatility that must be exceeded before participants save differently relative to receiving a stable income.