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Commitment, Risk, and Consumption: Do Birds of a Feather Have Bigger Nests?

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  • Stephen H. Shore

    (Johns Hopkins University)

  • Todd Sinai

    (Wharton School of the University of Pennsylvania and NBER)

Abstract

Consumption commitments-goods like housing for which adjustment is costly-change the relationship between risk and consumption. Commitment provides a motive to reduce consumption when possible future losses are too small to warrant adjustment but not when losses are large enough that adjustment would be worthwhile. This implies conditions under which mean-preserving increases in risk can increase housing consumption. Our empirical evidence exploits the interaction of these conditions with a novel proxy for unemployment risk: couples sharing an occupation. Consistent with our model, same-occupation couples consume more housing only when adjustment costs are high and potential losses are sufficiently large. © 2010 The President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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Bibliographic Info

Article provided by MIT Press in its journal The Review of Economics and Statistics.

Volume (Year): 92 (2010)
Issue (Month): 2 (May)
Pages: 408-424

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Handle: RePEc:tpr:restat:v:92:y:2010:i:2:p:408-424

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References

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  1. John Y. Campbell & Joao F. Cocco, 2003. "Household Risk Management and Optimal Mortgage Choice," NBER Working Papers 9759, National Bureau of Economic Research, Inc.
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Cited by:
  1. Gathergood, John, 2011. "Unemployment risk, house price risk and the transition into home ownership in the United Kingdom," Journal of Housing Economics, Elsevier, Elsevier, vol. 20(3), pages 200-209, September.
  2. Andrew Postlewaite & Larry Samuelson & Dan Silverman, 2006. "Consumption Commitments and Employment Contracts," Levine's Bibliography 321307000000000145, UCLA Department of Economics.
  3. Cristina Barceló & Ernesto Villanueva, 2010. "The response of household wealth to the risk of losing the job: evidence from differences in firing costs," Banco de Espa�a Working Papers, Banco de Espa�a 1002, Banco de Espa�a.
  4. University of Iowa & Galina Vereshchagina, 2007. "Preferences for risk in a dynamic model with consumption commitments," 2007 Meeting Papers, Society for Economic Dynamics 567, Society for Economic Dynamics.
  5. Paciorek, Andrew & Sinai, Todd, 2012. "Does home owning smooth the variability of future housing consumption?," Journal of Urban Economics, Elsevier, vol. 71(2), pages 244-257.
  6. Mariotti, Francesco & Mumford, Karen A. & Pena-Boquete, Yolanda, 2014. "Household Asset Holding Diversification in Australia," IZA Discussion Papers 8302, Institute for the Study of Labor (IZA).
  7. Raj Chetty & Adam Szeidl, 2006. "Consumption Commitments and Risk Preferences," NBER Working Papers 12467, National Bureau of Economic Research, Inc.
  8. Salvador Ortigueira & Nawid Siassi, 2010. "How important is Intra-household Risk Sharing for Savings and Labor Supply?," Economics Working Papers, European University Institute ECO2010/36, European University Institute.
  9. Andrew Postlewaite & Larry Samuelson & Dan Silverman, 2006. "Consumption Commitments and Employment Contracts, Fourth Version," PIER Working Paper Archive, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania 07-020, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 09 Jul 2007.
  10. Davidoff, Thomas, 2010. "Home equity commitment and long-term care insurance demand," Journal of Public Economics, Elsevier, Elsevier, vol. 94(1-2), pages 44-49, February.
  11. Fran?ois Ortalo-Magn? & Andrea Prat, 2014. "On the Political Economy of Urban Growth: Homeownership versus Affordability," American Economic Journal: Microeconomics, American Economic Association, American Economic Association, vol. 6(1), pages 154-81, February.

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