Attitudes towards income risk in the presence of quantity constraints
AbstractConsidering a consumer with standard preferences, I trace out the consequences for risk aversion and prudence of quantity constraints on markets. I first show how the effect can be decomposed into a price risk effect and an endogenously changing risk aversion/prudence effect. Next, I calibrate locally both effects on relative risk aversion and prudence, using estimates on household demand for durables and labour supply. Finally, I perform a global numerical analysis of these effects. I conclude that quantity constraints have counter-intuitive and pronounced non-linear effects on risk attitudes.
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Bibliographic InfoPaper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2011020.
Date of creation: 01 Apr 2011
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household demand; income risk aversion; prudence; quantity constraints; labour supply;
Find related papers by JEL classification:
- D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
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