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Firm-Related Risk and Precautionary Saving Response

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

No 23182, NBER Working Papers from National Bureau of Economic Research, Inc

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: D91 E21 J24 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ias, nep-mac and nep-rmg
Date: 2017-02
Note: EFG LS
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Published as Andreas Fagereng & Luigi Guiso & Luigi Pistaferri, 2017. "Firm-Related Risk and Precautionary Saving Response," American Economic Review, American Economic Association, vol. 107(5), pages 393-397, May.

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