Consumption Commitments and Employment Contracts
AbstractWe examine an economy in which the cost of consuming some goods can be reduced by making commitments that reduce flexibility. We show that such consumption commitments can induce consumers with risk-neutral underlying utility functions to be risk averse over small variations in income, but sometimes to seek risk over large variations. As a result, optimal employment contracts will smooth wages conditional on being employed, but may incorporate a possibility of unemployment.
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Bibliographic InfoPaper provided by Penn Institute for Economic Research, Department of Economics, University of Pennsylvania in its series PIER Working Paper Archive with number 06-002.
Length: 26 pages
Date of creation: 01 Dec 2001
Date of revision: 14 Jan 2006
Unemployment; consumption commitments; optimal contracts;
Other versions of this item:
- 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.
- Andrew Postlewaite & Larry Samuelson & Dan Silverman, 2006. "Consumption Commitments and Employment Contracts," Levine's Bibliography 321307000000000145, UCLA Department of Economics.
- D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
- D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-01-24 (All new papers)
- NEP-MIC-2006-01-24 (Microeconomics)
- NEP-UPT-2006-01-24 (Utility Models & Prospect Theory)
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