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Consumption Commitments and Employment Contracts

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  • Andrew Postlewaite
  • Larry Samuelson
  • Dan Silverman

Abstract

We examine an economy in which the cost of consuming some goods can be reduced by making commitments that reduce flexibility. We show that such consumption commitments can induce consumers with risk-neutral underlying utility functions to be risk averse over small variations in income, but sometimes to seek risk over large variations. As a result, optimal employment contracts will smooth wages conditional on being employed, but may incorporate a possibility of unemployment. Copyright 2008, Wiley-Blackwell.

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File URL: http://hdl.handle.net/10.1111/j.1467-937X.2008.00472.x
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Bibliographic Info

Article provided by Oxford University Press in its journal The Review of Economic Studies.

Volume (Year): 75 (2008)
Issue (Month): 2 ()
Pages: 559-578

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Handle: RePEc:oup:restud:v:75:y:2008:i:2:p:559-578

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  1. Ellingsen, T. & Holden, S., 1995. "Sticky Consumption and Rigid Wages," Memorandum 21/1995, Oslo University, Department of Economics.
  2. Stephen H. Shore & Todd Sinai, 2005. "Commitment, Risk, and Consumption: Do Birds of a Feather Have Bigger Nests?," NBER Working Papers 11588, National Bureau of Economic Research, Inc.
  3. Ellingsen, Tore & Holden, Steinar, 1997. "Indebtedness and Unemployment: A Durable Relationship," Working Paper Series in Economics and Finance 186, Stockholm School of Economics.
  4. Azariadis, Costas, 1975. "Implicit Contracts and Underemployment Equilibria," Journal of Political Economy, University of Chicago Press, vol. 83(6), pages 1183-1202, December.
  5. Adam Szeidl & Raj Chetty, 2004. "Consumption Commitments and Asset Prices," 2004 Meeting Papers 354, Society for Economic Dynamics.
  6. Raj Chetty & Adam Szeidl, 2006. "Consumption Commitments and Risk Preferences," NBER Working Papers 12467, National Bureau of Economic Research, Inc.
  7. Baily, Martin Neil, 1974. "Wages and Employment under Uncertain Demand," Review of Economic Studies, Wiley Blackwell, vol. 41(1), pages 37-50, January.
  8. Raj Chetty & Adam Szeidl, 2004. "Consumption Commitments: Neoclassical Foundations for Habit Formation," NBER Working Papers 10970, National Bureau of Economic Research, Inc.
  9. Akerlof, George A & Miyazaki, Hajime, 1980. "The Implicit Contract Theory of Unemployment Meets the Wage Bill Argument," Review of Economic Studies, Wiley Blackwell, vol. 47(2), pages 321-38, January.
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Cited by:
  1. Schroyen, Fred, 2011. "Attitudes towards income risk in the presence of quantity constraints," Discussion Paper Series in Economics 7/2011, Department of Economics, Norwegian School of Economics.
  2. Decreuse, Bruno & van Ypersele, Tanguy, 2010. "Housing market regulation and the social demand for job protection," CEPR Discussion Papers 7845, C.E.P.R. Discussion Papers.
  3. University of Iowa & Galina Vereshchagina, 2007. "Preferences for risk in a dynamic model with consumption commitments," 2007 Meeting Papers 567, Society for Economic Dynamics.
  4. Luigi Guiso & Paolo Sodini, 2012. "Household Finance. An Emerging Field," EIEF Working Papers Series 1204, Einaudi Institute for Economics and Finance (EIEF), revised Mar 2012.
  5. Davidoff, Thomas, 2010. "Home equity commitment and long-term care insurance demand," Journal of Public Economics, Elsevier, vol. 94(1-2), pages 44-49, February.
  6. David Weiss & Cezar Santos, 2011. "Why Not Settle Down Already? A Quantitative Question," 2011 Meeting Papers 921, Society for Economic Dynamics.
  7. SCHROYEN, Fred, 2011. "Attitudes towards income risk in the presence of quantity constraints," CORE Discussion Papers 2011020, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  8. Drewianka, Scott, 2008. "Constrained labor supply and risk-aversion," Economics Letters, Elsevier, vol. 101(2), pages 130-133, November.

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