Consumption Commitments and Employment Contracts
We examine an economy in which the cost of consuming some goods can be reduced by making commitments that reduce flexibility. We show that such consumption commitments can induce consumers with risk-neutral underlying utility functions to be risk averse over small variations in income, but sometimes to seek risk over large variations. As a result, optimal employment contracts will smooth wages conditional on being employed, but may incorporate a possibility of unemployment.
|Date of creation:||14 Jan 2006|
|Date of revision:||07 Dec 2006|
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Web page: http://economics.sas.upenn.edu/pier
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MIT Press, vol. 92(2), pages 408-424, May.
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- Adam Szeidl & Raj Chetty, 2004. "Consumption Commitments and Asset Prices," 2004 Meeting Papers 354, Society for Economic Dynamics.
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- Ellingsen, Tore & Holden, Steinar, 1997. "Indebtedness and Unemployment: A Durable Relationship," SSE/EFI Working Paper Series in Economics and Finance 186, Stockholm School of Economics.
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