Consumption Commitments and Employment Contracts

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

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 that reduce flexibility. We show that such consumption commitments can induce consumers with risk-neutral underlying utility functions to be risk averse over small variations in income, but sometimes to seek risk over large variations. As a result, optimal employment contracts will smooth wages conditional on being employed, but may incorporate a possibility of unemployment.

Keywords: Unemployment; consumption commitments; optimal contracts (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-ltv and nep-upt
Date: Written
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http://economics.sas.upenn.edu/system/files/06-028.pdf (application/pdf)

Related works:
Working Paper: Consumption Commitments and Employment Contracts (2006)
Working Paper: Consumption Commitments and Employment Contracts (2006)
Journal Article: Consumption Commitments and Employment Contracts (2008)
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Persistent link: http://EconPapers.repec.org/RePEc:pen:papers:06-028

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