This file is part of IDEAS, which uses RePEc data


[ Papers | Articles | Software | Books | Chapters | Authors | Institutions | JEL Classification | NEP reports | Search | New papers by email | Author registration | Rankings | Volunteers | FAQ | Blog | Help! ]

Consumption Commitments and Risk Preferences

Author info | Abstract | Publisher info | Download info | Related research | Statistics
Author Info
Raj Chetty
Adam Szeidl

Additional information is available for the following registered author(s):

Abstract

Many households devote a large fraction of their budgets to "consumption commitments" -- goods that involve transaction costs and are infrequently adjusted. This paper characterizes risk preferences in an expected utility model with commitments. We show that commitments affect risk preferences in two ways: (1) they amplify risk aversion with respect to moderate-stake shocks and (2) they create a motive to take large-payoff gambles. The model thus helps resolve two basic puzzles in expected utility theory: the discrepancy between moderate-stake and large-stake risk aversion and lottery playing by insurance buyers. We discuss applications of the model such as the optimal design of social insurance and tax policies, added worker effects in labor supply, and portfolio choice. Using event studies of unemployment shocks, we document evidence consistent with the consumption adjustment patterns implied by the model.

Download Info
To download:

If you experience problems downloading a file, check if you have the proper application to view it first. Information about this may be contained in the File-Format links below. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.nber.org/papers/w12467.pdf
File Format: application/pdf
File Function:
Download Restriction: Access to the full text is generally limited to series subscribers, however if the top level domain of the client browser is in a developing country or transition economy free access is provided. More information about subscriptions and free access is available at http://www.nber.org/wwphelp.html.

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Publisher Info
Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12467.

Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Length:
Date of creation: Aug 2006
Date of revision:
Handle: RePEc:nbr:nberwo:12467

Note: AP EFG LS PE
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Phone: 617-868-3900
Email:
Web page: http://www.nber.org
More information through EDIRC

For technical questions regarding this item, or to correct its listing, contact: ().

Related research
Keywords:

Other versions of this item:

Find related papers by JEL classification:
E2 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment
H2 - Public Economics - - Taxation, Subsidies, and Revenue
H5 - Public Economics - - National Government Expenditures and Related Policies
J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
J64 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Unemployment: Models, Duration, Incidence, and Job Search

This paper has been announced in the following NEP Reports:

References listed on IDEAS
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. Charles Himmelberg & Christopher Mayer & Todd Sinai, 2005. "Assessing High House Prices: Bubbles, Fundamentals, and Misperceptions," NBER Working Papers 11643, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. 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. [Downloadable!]
    Other versions:
  3. Matthew Rabin., 2000. "Risk Aversion and Expected-Utility Theory: A Calibration Theorem," Economics Working Papers E00-279, University of California at Berkeley. [Downloadable!]
  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. [Downloadable!] (restricted)
  5. Matthew Rabin & Richard H. Thaler, 2001. "Anomalies: Risk Aversion," Journal of Economic Perspectives, American Economic Association, vol. 15(1), pages 219-232, Winter. [Downloadable!] (restricted)
  6. N. Gregory Mankiw & Stephen P. Zeldes, 1991. "The Consumption of Stockholders and Non-Stockholders," NBER Working Papers 3402, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  7. Jacob Mincer, 1962. "Labor Force Participation of Married Women," NBER Chapters, in: Aspects of Labor Economics, pages 63-106 National Bureau of Economic Research, Inc. [Downloadable!]
  8. Gruber, Jonathan, 1997. "The Consumption Smoothing Benefits of Unemployment Insurance," American Economic Review, American Economic Association, vol. 87(1), pages 192-205, March. [Downloadable!] (restricted)
  9. Milton Friedman & L. J. Savage, 1948. "The Utility Analysis of Choices Involving Risk," Journal of Political Economy, University of Chicago Press, vol. 56, pages 279. [Downloadable!] (restricted)
  10. repec:att:wimass:1920415 is not listed on IDEAS
  11. Fratantoni, Michael C, 2001. "Homeownership, Committed Expenditure Risk, and the Stockholding Puzzle," Oxford Economic Papers, Oxford University Press, vol. 53(2), pages 241-59, April.
  12. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March. [Downloadable!] (restricted)
  13. Laibson, David, 1997. "Golden Eggs and Hyperbolic Discounting," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 443-77, May.
  14. Bruno Jullien & Bernard Salanie, 2000. "Estimating Preferences under Risk: The Case of Racetrack Bettors," Journal of Political Economy, University of Chicago Press, vol. 108(3), pages 503-530, June. [Downloadable!] (restricted)
    Other versions:
  15. Melvin Stephens, 2002. "Worker Displacement and the Added Worker Effect," Journal of Labor Economics, University of Chicago Press, vol. 20(3), pages 504-537, July. [Downloadable!]
  16. Orazio P. Attanasio, 1995. "Consumer Durables and Inertial Behavior: Estimation and Aggregation of (S,s) Rules," NBER Working Papers 5282, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  17. Robert F. Martin, 2003. "Consumption, durable goods, and transaction costs," International Finance Discussion Papers 756, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  18. Del Boca, Daniela & Lusardi, Annamaria, 2003. "Credit market constraints and labor market decisions," Labour Economics, Elsevier, vol. 10(6), pages 681-703, December. [Downloadable!] (restricted)
    Other versions:
  19. Eberly, Janice C, 1994. "Adjustment of Consumers' Durables Stocks: Evidence from Automobile Purchases," Journal of Political Economy, University of Chicago Press, vol. 102(3), pages 403-36, June. [Downloadable!] (restricted)
    Other versions:
  20. Ashenfelter, Orley, 1980. "Unemployment as Disequilibrium in a Model of Aggregate Labor Supply," Econometrica, Econometric Society, vol. 48(3), pages 547-64, April. [Downloadable!] (restricted)
    Other versions:
  21. Lundberg, Shelly, 1985. "The Added Worker Effect," Journal of Labor Economics, University of Chicago Press, vol. 3(1), pages 11-37, January. [Downloadable!] (restricted)
  22. Chipman, John S., 1977. "An empirical implication of Auspitz-Lieben-Edgeworth-Pareto complementarity," Journal of Economic Theory, Elsevier, vol. 14(1), pages 228-231, February. [Downloadable!] (restricted)
  23. Jonathan Gruber, 1994. "The Consumption Smoothing Benefits of Unemployment Insurance," NBER Working Papers 4750, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  24. Roger Hartley & Lisa Farrell, 2002. "Can Expected Utility Theory Explain Gambling?," American Economic Review, American Economic Association, vol. 92(3), pages 613-624, June. [Downloadable!]
    Other versions:
  25. Harry Markowitz, 1952. "The Utility of Wealth," Journal of Political Economy, University of Chicago Press, vol. 60, pages 151. [Downloadable!] (restricted)
  26. Gollier, Christian, 2005. "Does Flexibility Enhance Risk Tolerance?," IDEI Working Papers 390, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
  27. Raj Chetty, 2004. "Consumption Commitments, Unemployment Durations, and Local Risk Aversion," NBER Working Papers 10211, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  28. Adam Szeidl & Raj Chetty, 2005. "Consumption Commitments: Neoclassical Foundations for Habit Formation," 2005 Meeting Papers 122, Society for Economic Dynamics. [Downloadable!]
    Other versions:
  29. Cicchetti, Charles J & Dubin, Jeffrey A, 1994. "A Microeconometric Analysis of Risk Aversion and the Decision to Self-Insure," Journal of Political Economy, University of Chicago Press, vol. 102(1), pages 169-86, February. [Downloadable!] (restricted)
  30. Charles T. Clotfelter & Philip J. Cook, 1988. "Implicit Taxation in Lottery Finance," NBER Working Papers 2246, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  31. Blundell, Richard & Macurdy, Thomas, 1999. "Labor supply: A review of alternative approaches," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 27, pages 1559-1695 Elsevier. [Downloadable!] (restricted)
    Other versions:
  32. Grossman, Sanford J & Laroque, Guy, 1990. "Asset Pricing and Optimal Portfolio Choice in the Presence of Illiquid Durable Consumption Goods," Econometrica, Econometric Society, vol. 58(1), pages 25-51, January. [Downloadable!] (restricted)
    Other versions:
  33. Matthew Rabin, 2000. "Risk Aversion and Expected-Utility Theory: A Calibration Theorem," Econometrica, Econometric Society, vol. 68(5), pages 1281-1292, September.
  34. Matthew Rabin, 2000. "Risk Aversion and Expected-Utility Theory: A Calibration Theorem," Department of Economics, Working Paper Series 1034, Department of Economics, Institute for Business and Economic Research, UC Berkeley. [Downloadable!]
Full references

Cited by:
(explanations, 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. Drew Fudenberg & David K Levine, 2009. "Self Control, Risk Aversion, and the Allais Paradox," Levine's Working Paper Archive 843644000000000332, David K. Levine. [Downloadable!]
  2. Mary F. Evans & V. Kerry Smith, 2009. "Measuring How Risk Tradeoffs Adjust With Income," NBER Working Papers 15372, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Hassler, John & Rodríguez Mora, José Vicente, 2007. "Unemployment Insurance Design: Inducing Moving and Retraining," CEPR Discussion Papers 6364, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  4. João Ejarque & Søren Leth-Petersen, 2008. "Consumption and Savings of First Time House Owners: How Do They Deal with Adverse Income Shocks?," CAM Working Papers 2008-08, University of Copenhagen. Department of Economics. Centre for Applied Microeconometrics. [Downloadable!]
  5. Andrew Postlewaite & Larry Samuelson & Dan Silverman, 2006. "Consumption Commitments and Employment Contracts," PIER Working Paper Archive 06-028, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 07 Dec 2006. [Downloadable!]
    Other versions:
  6. Raj Chetty, 2008. "Moral Hazard vs. Liquidity and Optimal Unemployment Insurance," NBER Working Papers 13967, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Julio J. Rotemberg, 2007. "Minimally altruistic wages and unemployment in a matching model," Working Papers 07-5, Federal Reserve Bank of Boston. [Downloadable!]
    Other versions:
  8. Dora Gicheva & Justine Hastings & Sofia Villas-Boas, 2007. "Revisiting the Income Effect: Gasoline Prices and Grocery Purchases," NBER Working Papers 13614, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  9. Raymond B. Palmquist & Daniel J. Phaneuf & V. Kerry Smith, 2007. "Measuring the Values for Time," NBER Working Papers 13594, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  10. Andrew Postlewaite & Larry Samuelson & Dan Silverman, 2006. "Consumption Commitments and Employment Contracts, Fourth Version," PIER Working Paper Archive 07-020, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 09 Jul 2007. [Downloadable!]
  11. Aaron Strong & V. Kerry Smith, 2008. "Reconsidering the Economics of Demand Analysis with Kinked Budget Constraints," NBER Working Papers 14304, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  12. Luigi Guiso, 2009. "A Test of Narrow Framing and its Origin," Economics Working Papers ECO2009/02, European University Institute. [Downloadable!]
    Other versions:
Statistics
Access and download statistics

Did you know? IDEAS also computes impact factors for journals and working paper series.

This page was last updated on 2009-11-21.

This information is provided to you by IDEAS at the Department of Economics, College of Liberal Arts and Sciences, University of Connecticut using RePEc data on a server sponsored by the Society for Economic Dynamics.