Attitudes Towards Income Risk in the Presence of Quantity Constraints

41 Pages Posted: 15 Apr 2011

See all articles by Fred Schroyen

Fred Schroyen

Norwegian School of Economics (NHH) - Department of Economics

Date Written: April 7, 2011

Abstract

Considering a consumer with standard preferences, I trace out the consequences for risk aversion and prudence of quantity constraints on markets. I first show how the effect can be decomposed into a price risk effect and an endogenously changing risk aversion/prudence effect. Next, I calibrate locally both effects on relative risk aversion and prudence, using estimates on household demand for durables and labour supply. Finally, I perform a global numerical analysis of these effects. I conclude that quantity constraints have counter-intuitive and pronounced non-linear effects on risk attitudes.

Keywords: Household demand, income risk aversion, prudence, quantity.

JEL Classification: D11, D81

Suggested Citation

Schroyen, Fred, Attitudes Towards Income Risk in the Presence of Quantity Constraints (April 7, 2011). NHH Dept. of Economics Discussion Paper No. 7/2011, Available at SSRN: https://ssrn.com/abstract=1808607 or http://dx.doi.org/10.2139/ssrn.1808607

Fred Schroyen (Contact Author)

Norwegian School of Economics (NHH) - Department of Economics ( email )

Helleveien 30
N-5035 Bergen
Norway

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