Attitudes Towards Income Risk in the Presence of Quantity Constraints
41 Pages Posted: 15 Apr 2011
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: Suggested Citation