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

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  • Stephen H. Shore
  • Todd Sinai

Abstract

We show that incorporating consumption commitments into a standard model of precautionary saving can complicate the usual relationship between risk and consumption. In particular, we present a model where the presence of plausible adjustment costs can cause a mean-preserving increase in unemployment risk to lead to increased consumption. The predictions of this model are consistent with empirical evidence from dual-earning couples. Couples who share an occupation face increased risk as their unemployment shocks are more highly correlated. Such couples spend more on owner-occupied housing than other couples, spend no more on rent, and are more likely to rent than own. This pattern is strongest when the household faces higher moving costs, or when unemployment insurance provides a less generous safety net.

Suggested Citation

  • Stephen H. Shore & Todd Sinai, 2005. "Commitment, Risk, and Consumption: Do Birds of a Feather Have Bigger Nests?," NBER Working Papers 11588, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:11588
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    References listed on IDEAS

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    1. Kimball, Miles S, 1990. "Precautionary Saving in the Small and in the Large," Econometrica, Econometric Society, vol. 58(1), pages 53-73, January.
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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. 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.
    3. 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.
    4. 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.
    5. repec:eee:juecon:v:99:y:2017:i:c:p:107-119 is not listed on IDEAS
    6. 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.
    7. 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.
    8. 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.
    9. 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.
    10. 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.
    11. 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.
    12. Ni, Shawn & Seol, Youn, 2014. "New evidence on excess sensitivity of household consumption," Journal of Monetary Economics, Elsevier, vol. 63(C), pages 80-94.
    13. Philippe Bracke & Christian Hilber & Olmo Silva, 2012. "Homeownerhip and Entrepreneurship," SERC Discussion Papers 0103, Spatial Economics Research Centre, LSE.
    14. Raj Chetty & Adam Szeidl, 2007. "Consumption Commitments and Risk Preferences," The Quarterly Journal of Economics, Oxford University Press, vol. 122(2), pages 831-877.
    15. 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.
    16. 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.
    17. 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.

    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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