Consumption Commitments and Employment Contracts

32 Pages Posted: 11 Jul 2007

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: 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

Postlewaite, Andrew and Samuelson, Larry and Silverman, Dan, Consumption Commitments and Employment Contracts (July 9, 2007). PIER Working Paper No. 07-020, Available at SSRN: https://ssrn.com/abstract=999953 or http://dx.doi.org/10.2139/ssrn.999953

Andrew Postlewaite (Contact Author)

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
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HOME PAGE: http://www.econ.upenn.edu/~apostlew

Larry Samuelson

Yale University - Department of Economics ( email )

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Yale University - Cowles Foundation

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Dan Silverman

University of Michigan at Ann Arbor - Economics Department ( email )

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734-764-2769 (Fax)

HOME PAGE: http://www.econ.lsa.umich.edu/

National Bureau of Economic Research (NBER)

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