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Firm-Related Risk and Precautionary Saving Response

Listed author(s):
  • Andreas Fagereng
  • Luigi Guiso
  • Luigi Pistaferri

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.

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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 107 (2017)
Issue (Month): 5 (May)
Pages: 393-397

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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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