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Attitudes towards income risk in the presence of quantity constraints

Author

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  • SCHROYEN, Fred

    (Department of Economics, Norwegian School of Economics, N-5045 Bergen, Norway; Health Economics Bergen, Norway and Université catholique de Louvain, CORE, B-1348 Louvain-la-Neuve, Belgium)

Abstract

Considering a consumer with standard preferences, I trace out the consequences for risk aversion and prudence of quantity constraints on markets. I first show how the effect can be decomposed into a price risk effect and an endogenously changing risk aversion/prudence effect. Next, I calibrate locally both effects on relative risk aversion and prudence, using estimates on household demand for durables and labour supply. Finally, I perform a global numerical analysis of these effects. I conclude that quantity constraints have counter-intuitive and pronounced non-linear effects on risk attitudes.

Suggested Citation

  • SCHROYEN, Fred, 2011. "Attitudes towards income risk in the presence of quantity constraints," LIDAM Discussion Papers CORE 2011020, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    • Handle: RePEc:cor:louvco:2011020
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    References listed on IDEAS

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    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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