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Consumption Commitments and Employment Contracts, Second VersionAndrew PostlewaiteUniversity of Pennsylvania - Department of Economics Larry SamuelsonYale University Dan SilvermanUniversity of Michigan at Ann Arbor - Economics Department; National Bureau of Economic Research (NBER) January 14, 2006 PIER Working Paper No. 06-002 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.
Number of Pages in PDF File: 27 Keywords: Unemployment, consumption commitments, optimal contracts JEL Classification: D21, D31, D81, J34 working papers seriesDate posted: January 20, 2006Suggested CitationContact Information
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