Commitment, Risk, and Consumption: Do Birds of a Feather Have Bigger Nests?

Stephen H. Shore and Todd Sinai

No 11588, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: D8 E21 R21 (search for similar items in EconPapers)
Date: 2005-08
New Economics Papers: this item is included in nep-mac and nep-ure
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Citations: View citations in EconPapers (4)

Published as 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, 07.

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Journal Article: Commitment, Risk, and Consumption: Do Birds of a Feather Have Bigger Nests? (2010)
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