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Author: Stephen H. Shore
Publisher:
ISBN:
Category : Dual-career families
Languages : en
Pages : 58
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Book Description
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.
Author: Stephen H. Shore
Publisher:
ISBN:
Category : Dual-career families
Languages : en
Pages : 58
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Book Description
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.
Author: Raj Chetty
Publisher:
ISBN:
Category :
Languages : en
Pages : 0
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Book Description
We analyze the implications of household-level adjustment costs for the dynamics of aggregate consumption. We show that an economy in which agents have "consumption commitments" is approximately equivalent to a habit formation model in which the habit stock is a weighted average of past consumption if idiosyncratic risk is large relative to aggregate risk. Consumption commitments can thus explain the empirical regularity that consumption is excessively sensitive and excessively smooth, findings that are typically attributed to habit formation. Unlike habit formation and other theories, but consistent with empirical evidence, the consumption commitments model also predicts that excess sensitivity and smoothness vanish for large shocks. These results suggest that behavior previously attributed to habit formation may be better explained by adjustment costs. We develop additional testable predictions to further distinguish the commitment and habit models and show that the two models have different welfare implications.
Author: Raj Chetty
Publisher:
ISBN:
Category : Consumption (Economics)
Languages : en
Pages : 40
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Book Description
Many households devote a large fraction of their budgets to "consumption commitments" -- goods that involve transaction costs and are infrequently adjusted. This paper characterizes risk preferences in an expected utility model with commitments. We show that commitments affect risk preferences in two ways: (1) they amplify risk aversion with respect to moderate-stake shocks and (2) they create a motive to take large-payoff gambles. The model thus helps resolve two basic puzzles in expected utility theory: the discrepancy between moderate-stake and large-stake risk aversion and lottery playing by insurance buyers. We discuss applications of the model such as the optimal design of social insurance and tax policies, added worker effects in labor supply, and portfolio choice. Using event studies of unemployment shocks, we document evidence consistent with the consumption adjustment patterns implied by the model.
Author: A. Postlewaite
Publisher:
ISBN:
Category : Consumption (Economics)
Languages : en
Pages : 41
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Book Description
We examine an economy in which the cost of consuming some goods can be reduced by making commitments to consumption levels independent of the state. For example, it is cheaper to produce housing services via owner-occupied than rented housing, but the transactions costs associated with the former prompt relatively inflexible housing consumption paths. We show that consumption commitments can cause risk-neutral consumers to care about risk, creating incentives to both insure risks and bunch uninsured risks together. For example, workers may prefer to avoid wage risk while bearing an unemployment risk that is concentrated in as few states as possible.
Author: Galina M. Vereshchagina
Publisher:
ISBN:
Category :
Languages : en
Pages : 38
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Book Description
This paper characterizes the solution to the consumption/savings decision problem in the presence of consumption commitments (goods that involve fixed transaction costs and are infrequently adjusted). The findings in recent theoretical literature have suggested that consumption commitments may help explain simultaneous purchasing of insurance and lotteries as well as the equity premium puzzle because they (i) create incentives for gambling and (ii) amplify risk aversion with respect to small risks. This paper argues that even though these predictions naturally arise in static models, they do not necessarily hold in a dynamic setup. We show that (i) the possibility of choosing when to adjust the consumption level of the commitment good can eliminate the gambling motive and (ii) the agents, who plan to make the adjustment in the future, become more tolerant to small risks due to the presence of consumption commitments.
Author: Dan P. Silverman
Publisher:
ISBN:
Category :
Languages : en
Pages : 41
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Book Description
We examine an economy in which the cost of consuming some goods can be reduced by making commitments to consumption levels independent of the state. For example, it is cheaper to produce housing services via owner-occupied than rented housing, but the transactions costs associated with the former prompt relatively inflexible housing consumption paths. We show that consumption commitments can cause risk-neutral consumers to care about risk, creating incentives to both insure risks and bunch uninsured risks together. For example, workers may prefer to avoid wage risk while bearing an unemployment risk that is concentrated in as few states as possible
Author: Andrew Postlewaite
Publisher:
ISBN:
Category :
Languages : en
Pages : 0
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Book Description
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.
Author: Raj Chetty
Publisher:
ISBN:
Category : Risk assessment
Languages : en
Pages : 118
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Book Description
Author: Andrew Postlewaite
Publisher:
ISBN:
Category :
Languages : en
Pages : 27
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Book Description
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.
Author: Narayana R. Kocherlakota
Publisher:
ISBN:
Category : Consumption (Economics)
Languages : en
Pages : 32
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Book Description
