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Consumption, Commitmants and Preferences for Risk

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Author Info
Andrew Postlewaite
Larry Samuelson
Dan Silverman

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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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10527.

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Date of creation: May 2004
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Handle: RePEc:nbr:nberwo:10527

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D21 - Microeconomics - - Production and Organizations - - - Firm Behavior
D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Akerlof, George A & Miyazaki, Hajime, 1980. "The Implicit Contract Theory of Unemployment Meets the Wage Bill Argument," Review of Economic Studies, Blackwell Publishing, vol. 47(2), pages 321-38, January. [Downloadable!] (restricted)
  2. Ellingsen, Tore & Holden, Steinar, 1995. "Sticky Consumption and Rigid Wages," Working Paper Series in Economics and Finance 62, Stockholm School of Economics.
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  3. Kihlstrom, Richard E & Mirman, Leonard J, 1981. "Constant, Increasing and Decreasing Risk Aversion with Many Commodities," Review of Economic Studies, Blackwell Publishing, vol. 48(2), pages 271-80, April. [Downloadable!] (restricted)
  4. Adam Szeidl & Raj Chetty, 2004. "Consumption Commitments and Asset Prices," 2004 Meeting Papers 354, Society for Economic Dynamics. [Downloadable!]
  5. Deaton, A. & Grosh, M., 1998. "Consumption," Papers 191, Princeton, Woodrow Wilson School - Development Studies.
  6. Baily, Martin Neil, 1974. "Wages and Employment under Uncertain Demand," Review of Economic Studies, Blackwell Publishing, vol. 41(1), pages 37-50, January. [Downloadable!] (restricted)
  7. Azariadis, Costas, 1975. "Implicit Contracts and Underemployment Equilibria," Journal of Political Economy, University of Chicago Press, vol. 83(6), pages 1183-1202, December. [Downloadable!] (restricted)
  8. 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. [Downloadable!] (restricted)
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Cited by:
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  1. Drew Fudenberg & David K Levine, 2007. "Self Control, Risk Aversion, and the Allais Paradox," Levine's Working Paper Archive 843644000000000332, UCLA Department of Economics. [Downloadable!]
  2. Raj Chetty & Adam Szeidl, 2004. "Consumption Commitments: Neoclassical Foundations for Habit Formation," NBER Working Papers 10970, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Benjamin Eden, 2008. "Substitution, Risk Aversion and Asset Prices: An Expected Utility Approach," Working Papers 0803, Department of Economics, Vanderbilt University. [Downloadable!]
  4. Steinar Holden & Fredrik Wulfsberg, 2007. "How strong is the case for downward real wage rigidity?," Working Papers 07-6, Federal Reserve Bank of Boston. [Downloadable!]
  5. 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. [Downloadable!] (restricted)
  6. Raj Chetty & Adam Szeidl, 2006. "Consumption Commitments and Risk Preferences," NBER Working Papers 12467, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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