Consumption Commitments and Preferences for Risk

Andrew Postlewaite (), Larry Samuelson () and Dan Silverman
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Larry Samuelson: Department of Economics, University of Wisconsin

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

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: Unemployment; risk sharing; income distribution (search for similar items in EconPapers)
JEL-codes: D21 D31 D81 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mic
Date: 2001-12-01, Revised 2004-05-18
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Related works:
Working Paper: Consumption commitments and preferences for risk (2004)
Working Paper: Consumption Commitments and Preferences for Risk (2004)
Working Paper: Consumption, Commitmants and Preferences for Risk (2004)
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