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Abstract

We present a tractable model of the effects of nonfinancial risk on intertemporal choice. Our purpose is to provide a simple framework that can be adopted in fields like representative-agent macroeconomics, corporate finance, or political economy, where most modelers have chosen not to incorporate serious nonfinancial risk because available methods were too complex to yield transparent insights. Our model produces an intuitive analytical formula for target assets, and we show how to analyze transition dynamics using a familiar Ramsey-style phase diagram. Despite its starkness, our model captures most of the key implications of nonfinancial risk for intertemporal choice.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15265.

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Date of creation: Aug 2009
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Handle: RePEc:nbr:nberwo:15265

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Find related papers by JEL classification:

• C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
• D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
• E24 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution

This paper has been announced in the following NEP Reports:

• NEP-ALL-2009-08-22 (All new papers)
• NEP-BEC-2009-08-22 (Business Economics)
• NEP-DGE-2009-08-22 (Dynamic General Equilibrium)
• NEP-RMG-2009-08-22 (Risk Management)

References

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1. Miles S. Kimball, 1989. "Precautionary Saving in the Small and in the Large," NBER Working Papers 2848, National Bureau of Economic Research, Inc.
   
   • Kimball, Miles S, 1990. "Precautionary Saving in the Small and in the Large," Econometrica, Econometric Society, vol. 58(1), pages 53-73, January.
2. 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.
3. Simon G. Gilchrist & Ben Bernanke & Mark Gertler, 1994. "The financial accelerator and the flight to quality," Finance and Economics Discussion Series 94-18, Board of Governors of the Federal Reserve System (U.S.).
   
   • Bernanke, Ben & Gertler, Mark & Gilchrist, Simon, 1996. "The Financial Accelerator and the Flight to Quality," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 1-15, February.
   • Ben Bernanke & Mark Gertler & Simon Gilchrist, 1994. "The Financial Accelerator and the Flight to Quality," NBER Working Papers 4789, National Bureau of Economic Research, Inc.
   • Bernanke, Ben & Gertler, Mark & Gilchrist, Simon, 1994. "The Financial Accelerator and the Flight to Quality," Working Papers 94-24, C.V. Starr Center for Applied Economics, New York University.
4. Jonathan Parker & Bruce Preston, 2002. "Precautionary Saving and Consumption Fluctuations," NBER Working Papers 9196, National Bureau of Economic Research, Inc.
   
   • Jonathan A. Parker & Bruce Preston, 2005. "Precautionary Saving and Consumption Fluctuations," American Economic Review, American Economic Association, vol. 95(4), pages 1119-1143, September.
   • Jonathan A. Parker & Bruce Preston, 2004. "Precautionary Saving and Consumption Fluctuations," Working Papers 140, Princeton University, Woodrow Wilson School of Public and International Affairs, Discussion Papers in Economics..
5. Christopher D. Carroll & Miles S. Kimball, 1995. "On the Concavity of the Consumption Function," Macroeconomics 9503003, EconWPA.
   
   • Carroll, Christopher D & Kimball, Miles S, 1996. "On the Concavity of the Consumption Function," Econometrica, Econometric Society, vol. 64(4), pages 981-92, July.
   • Christopher D. Carroll & Miles S. Kimball, 1995. "On the concavity of the consumption function," Finance and Economics Discussion Series 95-10, Board of Governors of the Federal Reserve System (U.S.).
6. repec:att:wimass:9722 is not listed on IDEAS
7. Toche, Patrick, 2005. "A tractable model of precautionary saving in continuous time," Economics Letters, Elsevier, vol. 87(2), pages 267-272, May.
8. Pierre-Olivier Gourinchas & Jonathan A. Parker, 1999. "Consumption Over the Life Cycle," NBER Working Papers 7271, National Bureau of Economic Research, Inc.
   
   • Pierre-Olivier Gourinchas & Jonathan A. Parker, 2002. "Consumption Over the Life Cycle," Econometrica, Econometric Society, vol. 70(1), pages 47-89, January.
   • Gourinchas, Pierre-Olivier & Parker, Jonathan A, 2000. "Consumption Over the Life-Cycle," CEPR Discussion Papers 2345, C.E.P.R. Discussion Papers.
9. Samuelson, Paul A, 1969. "Lifetime Portfolio Selection by Dynamic Stochastic Programming," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 239-46, August.
10. Merton, Robert C, 1969. "Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 247-57, August.
11. Cagetti, Marco, 2003. "Wealth Accumulation over the Life Cycle and Precautionary Savings," Journal of Business & Economic Statistics, American Statistical Association, vol. 21(3), pages 339-53, July.
12. Jonathan B. Berk & Richard Stanton & Josef Zechner, 2010. "Human Capital, Bankruptcy, and Capital Structure," Journal of Finance, American Finance Association, vol. 65(3), pages 891-926, 06.
    
    • Jonathan B. Berk & Richard Stanton & Josef Zechner, 2007. "Human Capital, Bankruptcy and Capital Structure," NBER Working Papers 13014, National Bureau of Economic Research, Inc.
13. Robert E. Hall, 1988. "Intertemporal Substitution in Consumption," NBER Working Papers 0720, National Bureau of Economic Research, Inc.
    
    • Hall, Robert E, 1988. "Intertemporal Substitution in Consumption," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 339-57, April.

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Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:

1. Handling complexity within microfoundations macro
   by Mainly Macro in Mainly Macro on 2012-08-11 10:57:00
2. Handling complexity within microfoundations macro
   by Mainly Macro in Mainly Macro on 2012-08-11 10:57:00

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Cited by:

1. Michael Sattinger, 2010. "The Markov Consumption Problem," Discussion Papers 10-03, University at Albany, SUNY, Department of Economics.
   
   • Sattinger, Michael, 2011. "The Markov consumption problem," Journal of Mathematical Economics, Elsevier, vol. 47(4-5), pages 409-416.
   • Michael Sattinger, 2010. "The Markov Consumption Problem," Discussion Papers 10-02, University at Albany, SUNY, Department of Economics.
2. Christopher Carroll & Jiri Slacalek & Martin Sommer, 2012. "Dissecting saving dynamics: measuring wealth, precautionary and credit effects," Working Paper Series 1474, European Central Bank.
   
   • Christopher Carroll & Jiri Slacalek & Martin Sommer, 2012. "Dissecting Saving Dynamics: Measuring Wealth, Precautionary, and Credit Effects," Economics Working Paper Archive 602, The Johns Hopkins University,Department of Economics.
   • Christopher Carroll & Martin Sommer & Jiri Slacalek, 2012. "Dissecting Saving Dynamics: Measuring Wealth, Precautionary, and Credit Effects," IMF Working Papers 12/219, International Monetary Fund.
3. Xavier Ragot & Edouard Challe, 2011. "Precautionary Saving over the Business Cycle," 2011 Meeting Papers 517, Society for Economic Dynamics.
4. Carroll, Christopher D & Jeanne, Olivier, 2009. "A Tractable Model of Precautionary Reserves, Net Foreign Assets, or Sovereign Wealth Funds," CEPR Discussion Papers 7449, C.E.P.R. Discussion Papers.
   
   • Christopher D. Carroll & Olivier Jeanne, 2009. "A Tractable Model of Precautionary Reserves, Net Foreign Assets, or Sovereign Wealth Funds," NBER Working Papers 15228, National Bureau of Economic Research, Inc.
   • Christopher D. Carroll & Olivier Jeanne, 2009. "A Tractable Model of Precautionary Reserves, Net Foreign Assets, or Sovereign Wealth Funds," Working Paper Series WP09-10, Peterson Institute for International Economics.
5. Tomi T. Kortela, 2011. "On the costs of disability insurance," 2011 Meeting Papers 445, Society for Economic Dynamics.
6. Jin, Ling & Chen, Kevin Z. & Yu, Bingxin & Huang, Zuhui, 2011. "How prudent are rural households in developing transition economies:," IFPRI discussion papers 1127, International Food Policy Research Institute (IFPRI).

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