Consumption Commitments and Preferences for Risk
AbstractWe examine an economy in which the cost of consuming some goods can be reduced by making commitments to consumption levels that do not vary across states. For example, moral hazard and matching considerations may make it cheaper to produce housing services via owner-occupied than rented housing, but the transactions costs associated with the former may compel consumers to adopt a realtively inflexible housing consumptin plan. We show that consumption commitments can cause risk-neutral consumers to care a great deal about risk, creating an incentive to insure risks and to bunch uninsured risks together. As a result, workers may preger to avoid wage risk while bearing an unemployment risk that is concentrated in as few states as possible. The interaction between consumptin and labor markets may give rise to multiple equilibria. The basic predictions of the model are compared with corresponding moments of US data on layoff risk and housing consumption.
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Bibliographic InfoPaper provided by Econometric Society in its series Econometric Society 2004 North American Winter Meetings with number 162.
Date of creation: 11 Aug 2004
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risk aversion; consumption commitments; wage contracts;
Other versions of this item:
- Andrew Postlewaite & Larry Samuelson & Dan Silverman, 2004. "Consumption, Commitmants and Preferences for Risk," NBER Working Papers 10527, National Bureau of Economic Research, Inc.
- Andrew Postlewaite & Larry Samuelson & Dan Silverman, 2001. "Consumption Commitments and Preferences for Risk," PIER Working Paper Archive 04-021, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 18 May 2004.
- Postlewaite,A. & Samuelson,L. & Silverman,D., 2004. "Consumption commitments and preferences for risk," Working papers 15, Wisconsin Madison - Social Systems.
- J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
- J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
- D8 - Microeconomics - - Information, Knowledge, and Uncertainty
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