Andrew Postlewaite () (Department of Economics, University of Pennsylvania) Larry Samuelson () (Department of Economics, University of Wisconsin-Madison) Dan Silverman () (Department of Economics, University of Michigan)
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We 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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Paper provided by Penn Institute for Economic Research, Department of Economics, University of Pennsylvania in its series PIER Working Paper Archive with number
06-002.
Find related papers by JEL classification: D21 - Microeconomics - - Production and Organizations - - - Firm Behavior D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
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