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Consumption commitments and preferences for risk

Author

Listed:
  • Postlewaite,A.
  • Samuelson,L.
  • Silverman,D.

    (University of Wisconsin-Madison, Social Systems Research Institute)

Abstract
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.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Postlewaite,A. & Samuelson,L. & Silverman,D., 2004. "Consumption commitments and preferences for risk," Working papers 15, Wisconsin Madison - Social Systems.
    • Handle: RePEc:att:wimass:200415
    as

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    File URL: http://www.ssc.wisc.edu/~larrysam/papers/concommit.pdf
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    References listed on IDEAS

    as
    1. George A. Akerlof & Hajime Miyazaki, 1980. "The Implicit Contract Theory of Unemployment meets the Wage Bill Argument," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 47(2), pages 321-338.
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    7. Adam Szeidl & Raj Chetty, 2004. "Consumption Commitments and Asset Prices," 2004 Meeting Papers 354, Society for Economic Dynamics.
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    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Drew Fudenberg & David K. Levine, 2011. "Risk, Delay, and Convex Self-Control Costs," American Economic Journal: Microeconomics, American Economic Association, vol. 3(3), pages 34-68, August.
    2. Raj Chetty & Adam Szeidl, 2016. "Consumption Commitments and Habit Formation," Econometrica, Econometric Society, vol. 84, pages 855-890, March.
    3. Raj Chetty & Adam Szeidl, 2007. "Consumption Commitments and Risk Preferences," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 122(2), pages 831-877.
    4. Stephen H. Shore & Todd Sinai, 2010. "Commitment, Risk, and Consumption: Do Birds of a Feather Have Bigger Nests?," The Review of Economics and Statistics, MIT Press, vol. 92(2), pages 408-424, May.
    5. Steinar Holden & Fredrik Wulfsberg, 2007. "Are real wages rigid downwards?," Working Paper 2007/01, Norges Bank.
    6. Holden, Steinar & Wulfsberg, Fredrik, 2009. "How strong is the macroeconomic case for downward real wage rigidity?," Journal of Monetary Economics, Elsevier, vol. 56(4), pages 605-615, May.
    7. Adam Szeidl & Raj Chetty, 2005. "Consumption Commitments: Neoclassical Foundations for Habit Formation," 2005 Meeting Papers 122, Society for Economic Dynamics.
    8. Benjamin Eden, 2008. "Substitution, Risk Aversion and Asset Prices: An Expected Utility Approach," Vanderbilt University Department of Economics Working Papers 0803, Vanderbilt University Department of Economics.
    9. Steinar Holden & Fredrik Wulfsberg, 2007. "How strong is the case for downward real wage rigidity?," Working Papers 07-6, Federal Reserve Bank of Boston.

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    More about this item

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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