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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 :
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: 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: 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 : Consumption (Economics)
Languages : en
Pages : 65
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Book Description
This paper studies consumption and portfolio choice in a model where agents have neoclassical preferences over two consumption goods, one of which involves a commitment in that its consumption can only be adjusted infrequently. Aggregating over a population of such agents implies dynamics identical to those of a representative consumer economy with habit formation utility. In particular, aggregate consumption is a slow-moving average of past consumption levels, and risk aversion is amplified because the marginal utility of wealth is determined by excess consumption over the prior commitment level. We test the model's prediction that commitments amplify risk aversion by using home tenure (years spent in current house) as a proxy for commitment: Recent home purchasers are unlikely to move in the near future, and are therefore more constrained by their housing commitment. We use a set of control groups to establish that the timing of marital shocks such as marriage and divorce can be used to create exogenous variation in home tenure conditional on age and wealth. Using these marital shocks as instruments, we find that the average investor reallocates $1,500 from safe assets to stocks per year in a house. Hence, recent home purchasers have highly amplified risk aversion, suggesting that real commitments are a quantitatively powerful source of habit-like behavior
Author: Yana Manyukhina
Publisher: Routledge
ISBN: 135171645X
Category : Philosophy
Languages : en
Pages : 246
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Book Description
This book engages with the topic of ethical consumption and applies a critical-realist approach to explore the process of becoming and being an ethical consumer. By integrating Margaret Archer’s theory of identity formation and Christian Coff’s work on food ethics, it develops a theoretical account explicating the generative mechanism that gives rise to ethical consumer practices and identities. The second part of the book presents the findings from a qualitative study with self-perceived ethical food consumers to demonstrate the fit between the proposed theoretical mechanism and the actual experiences of ethically committed consumers. Through integrating agency-focused and socio-centric perspectives on consumer behaviour, the book develops a more comprehensive and balanced approach to conceptualising and studying consumption processes and phenomena.
Author: Haimanti Banerjee
Publisher:
ISBN:
Category : Consumption
Languages : en
Pages : 37
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Book Description
I find transaction costs to have significant impact on aggregate savings behavior.
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: KENNETH GLENN DAU-SCHMIDT
Publisher:
ISBN:
Category :
Languages : en
Pages : 242
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Book Description
Arthur Okun and Martin Bailey.
