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Firm-Related Risk and Precautionary Saving Response

Andreas Fagereng (), Luigi Guiso () and Luigi Pistaferri

American Economic Review, 2017, vol. 107, issue 5, 393-97

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.

JEL-codes: D22 D24 J24 J31 (search for similar items in EconPapers)
Date: 2017
Note: DOI: 10.1257/aer.p20171093
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