Consumption Commitments and Employment Contracts, Fourth Version
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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. 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.
Bibliographic InfoPaper provided by Penn Institute for Economic Research, Department of Economics, University of Pennsylvania in its series PIER Working Paper Archive with number 07-020.
Length: 32 pages
Date of creation: 07 Dec 2006
Date of revision: 09 Jul 2007
Unemployment; consumption commitments; optimal contracts;
Find related papers by JEL classification:
- 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-2007-07-20 (All new papers)
- NEP-BEC-2007-07-20 (Business Economics)
- NEP-DGE-2007-07-20 (Dynamic General Equilibrium)
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.:
- 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.
- Stephen H. Shore & Todd Sinai, 2010. "Commitment, Risk, and Consumption: Do Birds of a Feather Have Bigger Nests?," The Review of Economics and Statistics, MIT Press, vol. 92(2), pages 408-424, May.
- Azariadis, Costas, 1975. "Implicit Contracts and Underemployment Equilibria," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 83(6), pages 1183-1202, December.
- Raj Chetty & Adam Szeidl, 2004.
"Consumption Commitments: Neoclassical Foundations for Habit Formation,"
NBER Working Papers
10970, National Bureau of Economic Research, Inc.
- Adam Szeidl & Raj Chetty, 2005. "Consumption Commitments: Neoclassical Foundations for Habit Formation," 2005 Meeting Papers, Society for Economic Dynamics 122, Society for Economic Dynamics.
- Akerlof, George A & Miyazaki, Hajime, 1980. "The Implicit Contract Theory of Unemployment Meets the Wage Bill Argument," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 47(2), pages 321-38, January.
- Raj Chetty & Adam Szeidl, 2006.
"Consumption Commitments and Risk Preferences,"
NBER Working Papers
12467, National Bureau of Economic Research, Inc.
- Baily, Martin Neil, 1974. "Wages and Employment under Uncertain Demand," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 41(1), pages 37-50, January.
- Ellingsen, Tore & Holden, Steinar, 1995.
"Sticky Consumption and Rigid Wages,"
Working Paper Series in Economics and Finance, Stockholm School of Economics
62, Stockholm School of Economics.
- Ellingsen, T. & Holden, S., 1995. "Sticky Consumption and Rigid Wages," Memorandum, Oslo University, Department of Economics 21/1995, Oslo University, Department of Economics.
- Ellingsen, Tore & Holden, Steinar, 1997. "Indebtedness and Unemployment: A Durable Relationship," Working Paper Series in Economics and Finance, Stockholm School of Economics 186, Stockholm School of Economics.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dolly Guarini).
If references are entirely missing, you can add them using this form.