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Attitudes towards income risk in the presence of quantity constraints

  • 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)

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    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.

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    File URL: http://uclouvain.be/cps/ucl/doc/core/documents/coredp2011_20web.pdf
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    Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2011020.

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    Date of creation: 01 Apr 2011
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    Handle: RePEc:cor:louvco:2011020
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    1. Andrew Postlewaite & Larry Samuelson & Dan Silverman, 2006. "Consumption Commitments and Employment Contracts," Levine's Bibliography 321307000000000145, UCLA Department of Economics.
    2. Deschamps, P.J., 1990. "Joint Tests for Regularity and Autocorrelation in Allocation Systems," Discussion Paper 1990-42, Tilburg University, Center for Economic Research.
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    4. Monica Paiella & Luigi Guiso, 2004. "Risk Aversion, Wealth and Background Risk," 2004 Meeting Papers 525, Society for Economic Dynamics.
    5. Deschamps, Robert, 1973. "Risk Aversion and Demand Functions," Econometrica, Econometric Society, vol. 41(3), pages 455-65, May.
    6. Raj Chetty, 2003. "A New Method of Estimating Risk Aversion," NBER Working Papers 9988, National Bureau of Economic Research, Inc.
    7. Cary Deck & Harris Schlesinger, 2008. "Exploring Higher-Order Risk Effects," CESifo Working Paper Series 2487, CESifo Group Munich.
    8. Hanoch, Giora, 1977. "Risk Aversion and Consumer Preferences," Econometrica, Econometric Society, vol. 45(2), pages 413-26, March.
    9. Philippe J. Deschamps, 2003. "Time-varying intercepts and equilibrium analysis: an extension of the dynamic almost ideal demand model," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 18(2), pages 209-236.
    10. Dreze, Jacques H. & Modigliani, Franco, 1972. "Consumption decisions under uncertainty," Journal of Economic Theory, Elsevier, vol. 5(3), pages 308-335, December.
    11. Robert B. Barsky & Miles S. Kimball & F. Thomas Juster & Matthew D. Shapiro, 1995. "Preference Parameters and Behavioral Heterogeneity: An Experimental Approach in the Health and Retirement Survey," NBER Working Papers 5213, National Bureau of Economic Research, Inc.
    12. Christian Josef Bauer & Wolfgang Buchholz, 2008. "How Changing Prudence and Risk Aversion Affect Optimal Saving," CESifo Working Paper Series 2438, CESifo Group Munich.
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