Firm-Related Risk and Precautionary Saving Response
16 Pages Posted: 30 Jan 2017
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Firm-Related Risk and Precautionary Saving Response
Date Written: January 2017
Abstract
We propose a new approach to identify the strength of the precautionary motive and the extent of self-insurance in response to earnings risk based on Euler equation estimates. To address endogeneity problems, we use Norwegian administrative data and instrument consumption and earnings volatility with the variance of firm-specific shocks. The instrument is valid because firms pass some of their productivity shocks onto wages; moreover, for most workers firm shocks are hard to avoid. Our estimates suggest a coefficient of relative prudence of 2, in a very plausible range.
Keywords: firm shocks, precautionary savings, self-insurance
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