Preferences for risk in a dynamic model with consumption commitments

University of Iowa and Galina Vereshchagina

No 567, 2007 Meeting Papers from Society for Economic Dynamics

Abstract: the consumers who start saving in order to increase consumption of the commitment good in the future become risk lovers. We also argue that such behavior is likely to arise due to the presence of borrowing constraints; therefore suggesting that in the economies with consumption commitments borrowing constraints can make uninsured risk desirable (in contrast, it is known that in standard models borrowing constraints increase the cost of uninsured risk).

Date: 2007
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