Consumption Commitments and Preferences for Risk

43 Pages Posted: 19 May 2004

See all articles by Andrew Postlewaite

Andrew Postlewaite

University of Pennsylvania - Department of Economics

Larry Samuelson

Yale University - Department of Economics; Yale University - Cowles Foundation

Dan Silverman

University of Michigan at Ann Arbor - Economics Department; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: May 18, 2004

Abstract

We examine an economy in which the cost of consuming some goods can be reduced by making commitments to consumption levels independent of the state. For example, it is cheaper to produce housing services via owner-occupied than rented housing, but the transactions costs associated with the former prompt relatively inflexible housing consumption paths. We show that consumption commitments can cause risk-neutral consumers to care about risk, creating incentives to both insure risks and bunch uninsured risks together. For example, workers may prefer to avoid wage risk while bearing an unemployment risk that is concentrated in as few states as possible.

Keywords: Unemployment, risk sharing, income distribution

JEL Classification: D21, D31, D81, J34

Suggested Citation

Postlewaite, Andrew and Samuelson, Larry and Silverman, Dan, Consumption Commitments and Preferences for Risk (May 18, 2004). Available at SSRN: https://ssrn.com/abstract=548245 or http://dx.doi.org/10.2139/ssrn.548245

Andrew Postlewaite (Contact Author)

University of Pennsylvania - Department of Economics ( email )

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Larry Samuelson

Yale University - Department of Economics ( email )

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Dan Silverman

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