Working Paper: NBER ID: w23182
Authors: Andreas Fagereng; Luigi Guiso; Luigi Pistaferri
Abstract: We propose a new approach to identify the strength of the precautionary motive and the extent of self-insurance in response to earnings risk based on Euler equation estimates. To address endogeneity problems, we use Norwegian administrative data and instrument consumption and earnings volatility with the variance of firm-specific shocks. The instrument is valid because firms pass some of their productivity shocks onto wages; moreover, for most workers firm shocks are hard to avoid. Our estimates suggest a coefficient of relative prudence of 2, in a very plausible range.
Keywords: No keywords provided
JEL Codes: D91; E21; J24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Earnings volatility (G17) | Consumption growth (E20) |
| Precautionary motive (D81) | Consumption growth (E20) |
| Earnings risk (J31) | Consumption fluctuations (E21) |
| Self-insurance (G52) | Consumption fluctuations (E21) |
| Firm-specific shocks (D25) | Earnings volatility (G17) |