Consumption Commitments and Employment Contracts
32 Pages Posted: 11 Jul 2007
There are 2 versions of this paper
Consumption Commitments and Employment Contracts
Date Written: July 9, 2007
Abstract
We examine an economy in which the cost of consuming some goods can be reduced by making commitments that reduce flexibility. We show that such consumption commitments can induce consumers with risk-neutral underlying utility functions to be risk averse over small variations in income, but sometimes to seek risk over large variations. As a result, optimal employment contracts will smooth wages conditional on being employed, but may incorporate a possibility of unemployment.
Note: A previous version of this paper can be found at: http://ssrn.com/abstract=877314
Keywords: Unemployment, consumption commitments, optimal contracts
JEL Classification: D21, D31, D81, J34
Suggested Citation: Suggested Citation
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