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Precautionary Savings or Working Longer Hours?

  • Josep Pijoan-Mas

This paper quantifies the size of precautionary savings implied by a dynamic general equilibrium model with heterogeneous agents when explicitly considering the labor supply decision of households. I find that precautionary savings are smaller than if they were measured by use of a model economy without labor decision and that they can even be negative. In addition, the incomplete markets economy is smaller in size than its complete markets counterparts: aggregate output in the incomplete markets economy is between 82% and 94% of aggregate output in the complete markets economies. These result are in stark contrast to the ones implied by models without labor choice and are due to the importance of hours as a mechanism to confront wage fluctuations

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Paper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number 350.

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Date of creation: 2004
Handle: RePEc:red:sed004:350
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

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  1. Felix Kubler & Karl Schmedders, 2000. "Incomplete Markets, Transitory Shocks, and Welfare," Discussion Papers 1285, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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  9. Diaz, Antonia & Pijoan-Mas, Josep & Rios-Rull, Jose-Victor, 2003. "Precautionary savings and wealth distribution under habit formation preferences," Journal of Monetary Economics, Elsevier, vol. 50(6), pages 1257-1291, September.
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  17. Jonathan Heathcote & Kjetil Storesletten & Giovanni L. Violante, 2008. "The Macroeconomic Implications of Rising Wage Inequality in the United States," NBER Working Papers 14052, National Bureau of Economic Research, Inc.
  18. Hamish Low, 2005. "Self-Insurance in a Life-Cycle Model of Labor Supply and Savings," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(4), pages 945-975, October.
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  24. Altonji, Joseph G, 1986. "Intertemporal Substitution in Labor Supply: Evidence from Micro Data," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages S176-S215, June.
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