Working Paper: NBER ID: w10527
Authors: Andrew Postlewaite; Larry Samuelson; Dan Silverman
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.
Keywords: Consumption Commitments; Risk Preferences; Income Volatility; Housing Market
JEL Codes: D21; D31; D81; J34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Consumption commitments (E21) | Risk preferences (D81) |
| Income volatility (D31) | Consumption commitments (E21) |
| Consumption commitments (E21) | Risk-averse behavior (D81) |
| Income volatility (D31) | Home ownership (R21) |
| Consumption commitments (E21) | Wage smoothing (J31) |
| Risk preferences (D81) | Labor market decisions (J29) |
| Consumption commitments (E21) | Economies of scale in risk bearing (G32) |