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Commitment, Risk, and Consumption: Do Birds of a Feather Have Bigger Nests?

Author

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  • Stephen H. Shore

    (Johns Hopkins University)

  • Todd Sinai

    (Wharton School of the University of Pennsylvania and NBER)

Abstract

Consumption commitments-goods like housing for which adjustment is costly-change the relationship between risk and consumption. Commitment provides a motive to reduce consumption when possible future losses are too small to warrant adjustment but not when losses are large enough that adjustment would be worthwhile. This implies conditions under which mean-preserving increases in risk can increase housing consumption. Our empirical evidence exploits the interaction of these conditions with a novel proxy for unemployment risk: couples sharing an occupation. Consistent with our model, same-occupation couples consume more housing only when adjustment costs are high and potential losses are sufficiently large. © 2010 The President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Suggested Citation

  • 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.
  • Handle: RePEc:tpr:restat:v:92:y:2010:i:2:p:408-424
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    References listed on IDEAS

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    Cited by:

    1. Bracke, Philippe & Hilber, Christian A.L. & Silva, Olmo, 2018. "Mortgage debt and entrepreneurship," Journal of Urban Economics, Elsevier, vol. 103(C), pages 52-66.
    2. Barceló, Cristina & Villanueva, Ernesto, 2016. "The response of household wealth to the risk of job loss: Evidence from differences in severance payments," Labour Economics, Elsevier, vol. 39(C), pages 35-54.
    3. Andrew Postlewaite & Larry Samuelson & Dan Silverman, 2006. "Consumption Commitments and Employment Contracts, Fourth Version," PIER Working Paper Archive 07-020, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 09 Jul 2007.
    4. Fran?ois Ortalo-Magn? & Andrea Prat, 2014. "On the Political Economy of Urban Growth: Homeownership versus Affordability," American Economic Journal: Microeconomics, American Economic Association, vol. 6(1), pages 154-181, February.
    5. Cristina Barceló & Ernesto Villanueva, 2010. "The response of household wealth to the risk of losing the job: evidence from differences in firing costs," Working Papers 1002, Banco de España;Working Papers Homepage.
    6. Ni, Shawn & Seol, Youn, 2014. "New evidence on excess sensitivity of household consumption," Journal of Monetary Economics, Elsevier, vol. 63(C), pages 80-94.
    7. Philippe Bracke & Christian Hilber & Olmo Silva, 2012. "Homeownerhip and Entrepreneurship," SERC Discussion Papers 0103, Spatial Economics Research Centre, LSE.
    8. Raj Chetty & Adam Szeidl, 2007. "Consumption Commitments and Risk Preferences," The Quarterly Journal of Economics, Oxford University Press, vol. 122(2), pages 831-877.
    9. Davidoff, Thomas, 2010. "Home equity commitment and long-term care insurance demand," Journal of Public Economics, Elsevier, vol. 94(1-2), pages 44-49, February.
    10. Paciorek, Andrew & Sinai, Todd, 2012. "Does home owning smooth the variability of future housing consumption?," Journal of Urban Economics, Elsevier, vol. 71(2), pages 244-257.
    11. Andrew Postlewaite & Larry Samuelson & Dan Silverman, 2008. "Consumption Commitments and Employment Contracts," Review of Economic Studies, Oxford University Press, vol. 75(2), pages 559-578.
    12. Cristina Barceló & Ernesto Villanueva, 2018. "The risk of job loss, household formation and housing demand: evidence from differences in severance payments," Working Papers 1849, Banco de España;Working Papers Homepage.
    13. Gathergood, John, 2011. "Unemployment risk, house price risk and the transition into home ownership in the United Kingdom," Journal of Housing Economics, Elsevier, vol. 20(3), pages 200-209, September.
    14. Ortigueira, Salvador & Siassi, Nawid, 2013. "How important is intra-household risk sharing for savings and labor supply?," Journal of Monetary Economics, Elsevier, vol. 60(6), pages 650-666.
    15. repec:eee:juecon:v:99:y:2017:i:c:p:107-119 is not listed on IDEAS
    16. Chen Hua & Mahani Reza S., 2012. "Optimal Demand for Insurance with Consumption Commitments," Asia-Pacific Journal of Risk and Insurance, De Gruyter, vol. 6(2), pages 1-26, June.
    17. Francesco Mariotti & Karen Mumford & Yolanda Pena-Boquete, 2015. "Household Asset-Holding Diversification in Australia," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 48(1), pages 43-64, March.
    18. Henry R. Hyatt, 2015. "Co-Working Couples and the Similar Jobs of Dual-Earner Households," Working Papers 15-23, Center for Economic Studies, U.S. Census Bureau.
    19. Henry R. Hyatt, 2015. "Co-Working Couples and the Similar Jobs of Dual-Earner Households," Working Papers 15-23r, Center for Economic Studies, U.S. Census Bureau.

    More about this item

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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