Working Paper: NBER ID: w15265
Authors: Christopher D. Carroll; Patrick Toche
Abstract: We present a tractable model of the effects of nonfinancial risk on intertemporal choice. Our purpose is to provide a simple framework that can be adopted in fields like representative-agent macroeconomics, corporate finance, or political economy, where most modelers have chosen not to incorporate serious nonfinancial risk because available methods were too complex to yield transparent insights. Our model produces an intuitive analytical formula for target assets, and we show how to analyze transition dynamics using a familiar Ramsey-style phase diagram. Despite its starkness, our model captures most of the key implications of nonfinancial risk for intertemporal choice.
Keywords: Buffer stock saving; Nonfinancial risk; Intertemporal choice
JEL Codes: C61; D11; E24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| unemployment risk (J65) | precautionary saving behavior (D14) |
| unemployment risk (J65) | consumption growth (E20) |
| precautionary saving behavior (D14) | consumption growth (E20) |
| unemployment risk (J65) | target level of wealth (D14) |