Three essays on households' financial decisions

In the first chapter of the present thesis, I empirically investigate precautionary savings under liquidity constraints in Italy using household panel data. I exploit a unique indicator of subjective variance of income growth, which allows to measure the strength of the precautionary motive for saving, and a variety of survey-based indicators of liquidity constraints. Using an endogenous switching regression approach, I eventually found the precautionary motive for savings to be stronger for those households who face binding constraints, or expect constraints to be binding in the future. Indeed, a complementarity relation exists between precautionary savings and effective and expected liquidity constraints. Moreover, the introduction of a survey-based measure of risk aversion allows a better identification of the coefficient associated with the subjective measure of variance of income growth. In the second chapter, relying on a direct question about the desired amount of precautionary wealth from the 2002 wave of the Italian Survey of Household Income and Wealth, I assess the main determinants of precautionary motive for saving. In particular, I provide an empirical assessment of the linkage existing between the composition of households' portfolio and the amount of wealth households wish to have to protect themselves against unexpected contingencies. As expected, a strong and negative correlation exists between the desired amount of precautionary wealth and the ownership of a portfolio made exclusively of safe assets. However, households do not seem to use portfolio diversification to reduce exposure to total risk. Finally, I address the issue of complementarity vs. substitution between �formal� and �informal� insurance schemes. Actually, trust in capital market would lower substantially the amount of wealth households wish to detain for precautionary reasons. However, there is no evidence in favour of a negative and strong linkage between precautionary saving and insurance. In the third chapter, I assess the relationship between initial household net wealth and the probability of switching to entrepreneurship in Italy and the United States, using household-level data from the Survey of Household Income and Wealth (SHIW) and the Panel Survey of Income Dynamics (PSID). I formulated several theoretical predictions, which are then compared with the data at hand. First of all, I argue that initial wealth should matter more for potential Italian entrepreneurs, who may encounter greater difficulties than their US counterparts in obtaining sufficient funds from a bank or financial institution to start a business. From this perspective, "informal markets" (i.e. help from friends or relatives) should play a more significant role for potential entrepreneurs in Italy, especially for those who are more likely to be constrained. Secondly, I claim that a well developed financial market, by reducing household exposure to financial risk, would positively affect transition into entrepreneurship. Therefore, I fill a gap in the literature introducing a portfolio diversification index, calculated as the inverse of the Herfindhal index, in order to assess the level of financial sophistication. Last but not least, I simultaneously estimate the probability of switching to entrepreneurship and changes in net wealth. Using a sample selection model with endogenous switching makes it possible to deal with endogeneity issues, related to the fact that households may actually accumulate assets prior to setting up a business.