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Firm-Related Risk and Precautionary Saving Response

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  • Andreas Fagereng
  • Luigi Guiso
  • Luigi Pistaferri

Abstract

We propose a new approach to identify the strength of the precautionary motive and the extent of self-insurance in response to earnings risk based on Euler equation estimates. To address endogeneity problems, we use Norwegian administrative data and instrument consumption and earnings volatility with the variance of firm-specific shocks. The instrument is valid because firms pass some of their productivity shocks onto wages; moreover, for most workers, firm shocks are hard to avoid. Our estimates suggest a coefficient of relative prudence of 2, in a very plausible range.

Suggested Citation

  • Andreas Fagereng & Luigi Guiso & Luigi Pistaferri, 2017. "Firm-Related Risk and Precautionary Saving Response," American Economic Review, American Economic Association, vol. 107(5), pages 393-397, May.
  • Handle: RePEc:aea:aecrev:v:107:y:2017:i:5:p:393-97
    Note: DOI: 10.1257/aer.p20171093
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    1. Andreas Fagereng & Elin Halvorsen, 2015. "Imputing consumption from Norwegian income and wealth registry data," Discussion Papers 831, Statistics Norway, Research Department.
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    More about this item

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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