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Consumption commitments and preferences for risk

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  • Postlewaite,A.
  • Samuelson,L.
  • Silverman,D.

    (University of Wisconsin-Madison, Social Systems Research Institute)

Abstract

We examine an economy in which the cost of consuming some goods can be reduced by making commitments to consumption levels independent of the state. For example, it is cheaper to produce housing services via owner-occupied than rented housing, but the transactions costs associated with the former prompt relatively inflexible housing consumption paths. We show that consumption commitments can cause risk-neutral consumers to care about risk, creating incentives to both insure risks and bunch uninsured risks together. For example, workers may prefer to avoid wage risk while bearing an unemployment risk that is concentrated in as few states as possible.

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Bibliographic Info

Paper provided by Wisconsin Madison - Social Systems in its series Working papers with number 15.

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Date of creation: 2004
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Handle: RePEc:att:wimass:200415

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Postal: UNIVERSITY OF WISCONSIN MADISON, SOCIAL SYSTEMS RESEARCH INSTITUTE(S.S.R.I.), MADISON WISCONSIN 53706 U.S.A.

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  1. Ellingsen, T. & Holden, S., 1995. "Sticky Consumption and Rigid Wages," Memorandum 21/1995, Oslo University, Department of Economics.
  2. Azariadis, Costas, 1975. "Implicit Contracts and Underemployment Equilibria," Journal of Political Economy, University of Chicago Press, vol. 83(6), pages 1183-1202, December.
  3. Lucas, Robert E, Jr & Rapping, Leonard A, 1969. "Real Wages, Employment, and Inflation," Journal of Political Economy, University of Chicago Press, vol. 77(5), pages 721-54, Sept./Oct.
  4. Adam Szeidl & Raj Chetty, 2004. "Consumption Commitments and Asset Prices," 2004 Meeting Papers 354, Society for Economic Dynamics.
  5. 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.
  6. Kihlstrom, Richard E & Mirman, Leonard J, 1981. "Constant, Increasing and Decreasing Risk Aversion with Many Commodities," Review of Economic Studies, Wiley Blackwell, vol. 48(2), pages 271-80, April.
  7. Baily, Martin Neil, 1974. "Wages and Employment under Uncertain Demand," Review of Economic Studies, Wiley Blackwell, vol. 41(1), pages 37-50, January.
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Cited by:
  1. Adam Szeidl & Raj Chetty, 2005. "Consumption Commitments: Neoclassical Foundations for Habit Formation," 2005 Meeting Papers 122, Society for Economic Dynamics.
  2. Steinar Holden & Fredrik Wulfsberg, 2007. "Are real wages rigid downwards?," Working Paper 2007/01, Norges Bank.
  3. Holden, Steinar & Wulfsberg, Fredrik, 2009. "How strong is the macroeconomic case for downward real wage rigidity?," Journal of Monetary Economics, Elsevier, vol. 56(4), pages 605-615, May.
  4. 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.
  5. Raj Chetty & Adam Szeidl, 2006. "Consumption Commitments and Risk Preferences," NBER Working Papers 12467, National Bureau of Economic Research, Inc.
  6. Steinar Holden & Fredrik Wulfsberg, 2007. "How strong is the case for downward real wage rigidity?," Working Papers 07-6, Federal Reserve Bank of Boston.
  7. Drew Fudenberg & David K. Levine, 2011. "Risk, Delay, and Convex Self-Control Costs," American Economic Journal: Microeconomics, American Economic Association, vol. 3(3), pages 34-68, August.

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