Borrowing Constraints, Portfolio Choice, and Precautionary Motives: Theoretical Predictions and Empirical Complications

This paper studies effects of two classes of borrowing constraints, collateralandincome-based, on wealth accumulation, portfolio behavior and on precautionarymotives. We examine the sensitivity of solutions to tightness of constraints, educationlevel, and preference parameters. The models are calibrated using the 1992 Survey ofConsumer Finances. The idea that constrained households engage in less borrowingand less holding of risky assets than desired is borne out for income-based...