Working Paper: NBER ID: w11588
Authors: Stephen H. Shore; Todd Sinai
Abstract: 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.
Keywords: Consumption Commitments; Housing Consumption; Income Risk; Unemployment Risk; Precautionary Saving
JEL Codes: E21; R21; D8
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increased unemployment risk (J65) | Increased housing consumption (R21) |
| Increased unemployment risk (J65) | Higher initial housing consumption (R21) |
| Correlated unemployment risks between spouses (J12) | Influencing housing decisions (R21) |
| Higher moving costs (J62) | More likely to rent than own (R21) |
| Less generous unemployment insurance (J65) | Stronger relationship between risk and housing consumption (D11) |
| Higher moving costs (J62) | Less likely to be homeowners (R21) |