Firm-Related Risk and Precautionary Saving Response

Luigi Guiso, Luigi Pistaferri and Andreas Fagereng

No 11809, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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: Precautionary savings; Firm shocks; Self-insurance (search for similar items in EconPapers)
Date: 2017-01
New Economics Papers: this item is included in nep-ias and nep-rmg
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Journal Article: Firm-Related Risk and Precautionary Saving Response (2017)
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Working Paper: Firm-Related Risk and Precautionary Saving Response (2017)
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