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Attitudes towards income risk in the presence of quantity constraints

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  • SCHROYEN, Fred

    ()
    (Department of Economics, Norwegian School of Economics, N-5045 Bergen, Norway; Health Economics Bergen, Norway and Université catholique de Louvain, CORE, B-1348 Louvain-la-Neuve, Belgium)

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    Abstract

    Considering 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 Info

    Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2011020.

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    Date of creation: 01 Apr 2011
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    Handle: RePEc:cor:louvco:2011020

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    Related research

    Keywords: household demand; income risk aversion; prudence; quantity constraints; labour supply;

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    1. Raj Chetty, 2006. "A New Method of Estimating Risk Aversion," American Economic Review, American Economic Association, vol. 96(5), pages 1821-1834, December.
    2. Andrew Postlewaite & Larry Samuelson & Dan Silverman, 2006. "Consumption Commitments and Employment Contracts," Levine's Bibliography 321307000000000145, UCLA Department of Economics.
    3. Cary Deck & Harris Schlesinger, 2008. "Exploring Higher-Order Risk Effects," CESifo Working Paper Series 2487, CESifo Group Munich.
    4. Luigi Guiso & Monica Paiella, 2007. "Risk Aversion, Wealth, and Background Risk," Economics Working Papers ECO2007/47, European University Institute.
    5. Deschamps, P J, 1993. "Joint Tests for Regularity and Autocorrelation in Allocation Systems," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(2), pages 195-211, April-Jun.
    6. DREZE, Jacques H. & MODIGLIANI, Franco, . "Cosumption decisions under uncertainty," CORE Discussion Papers RP -119, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    7. Neary, J.P & Roberts, K.W.S, 1978. "The Theory of Household Behaviour under Rationing," The Warwick Economics Research Paper Series (TWERPS) 132, University of Warwick, Department of Economics.
    8. Robert B. Barsky & Miles S. Kimball & F. Thomas Juster & Matthew D. Shapiro, 1997. "Preference Parameters and Behavioral Heterogeneity: An Experimental Approach in the Health and Retirement Survey," NBER Working Papers 5213, National Bureau of Economic Research, Inc.
    9. Christian Josef Bauer & Wolfgang Buchholz, 2008. "How Changing Prudence and Risk Aversion Affect Optimal Saving," CESifo Working Paper Series 2438, CESifo Group Munich.
    10. Philippe J. Deschamps, 2003. "Time-varying intercepts and equilibrium analysis: an extension of the dynamic almost ideal demand model," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 18(2), pages 209-236.
    11. Deschamps, Robert, 1973. "Risk Aversion and Demand Functions," Econometrica, Econometric Society, vol. 41(3), pages 455-65, May.
    12. Hanoch, Giora, 1977. "Risk Aversion and Consumer Preferences," Econometrica, Econometric Society, vol. 45(2), pages 413-26, March.
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