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Firm-Related Risk and Precautionary Saving Response

Author

Listed:
  • Fagereng, Andreas
  • Guiso, Luigi
  • Pistaferri, Luigi

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

  • Fagereng, Andreas & Guiso, Luigi & Pistaferri, Luigi, 2017. "Firm-Related Risk and Precautionary Saving Response," CEPR Discussion Papers 11809, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:11809
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    References listed on IDEAS

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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

    Keywords

    firm shocks; precautionary savings; self-insurance;

    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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