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Consumption Commitments and Preferences for Risk

  • Larry Samuelson
  • Andrew Postlewaite

We examine an economy in which the cost of consuming some goods can be reduced by making commitments to consumption levels that do not vary across states. For example, moral hazard and matching considerations may make it cheaper to produce housing services via owner-occupied than rented housing, but the transactions costs associated with the former may compel consumers to adopt a realtively inflexible housing consumptin plan. We show that consumption commitments can cause risk-neutral consumers to care a great deal about risk, creating an incentive to insure risks and to bunch uninsured risks together. As a result, workers may preger to avoid wage risk while bearing an unemployment risk that is concentrated in as few states as possible. The interaction between consumptin and labor markets may give rise to multiple equilibria. The basic predictions of the model are compared with corresponding moments of US data on layoff risk and housing consumption.

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Paper provided by Econometric Society in its series Econometric Society 2004 North American Winter Meetings with number 162.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:nawm04:162
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  1. Ellingsen, T. & Holden, S., 1995. "Sticky Consumption and Rigid Wages," Memorandum 21/1995, Oslo University, Department of Economics.
  2. Azariadis, Costas, 1975. "Implicit Contracts and Underemployment Equilibria," Journal of Political Economy, University of Chicago Press, vol. 83(6), pages 1183-1202, December.
  3. Akerlof, George A & Miyazaki, Hajime, 1980. "The Implicit Contract Theory of Unemployment Meets the Wage Bill Argument," Review of Economic Studies, Wiley Blackwell, vol. 47(2), pages 321-38, January.
  4. Lucas, Robert E, Jr & Rapping, Leonard A, 1969. "Real Wages, Employment, and Inflation," Journal of Political Economy, University of Chicago Press, vol. 77(5), pages 721-54, Sept./Oct.
  5. Baily, Martin Neil, 1974. "Wages and Employment under Uncertain Demand," Review of Economic Studies, Wiley Blackwell, vol. 41(1), pages 37-50, January.
  6. Adam Szeidl & Raj Chetty, 2004. "Consumption Commitments and Asset Prices," 2004 Meeting Papers 354, Society for Economic Dynamics.
  7. Kihlstrom, Richard E & Mirman, Leonard J, 1981. "Constant, Increasing and Decreasing Risk Aversion with Many Commodities," Review of Economic Studies, Wiley Blackwell, vol. 48(2), pages 271-80, April.
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