Consumption Commitments and Employment Contracts, Second Version
University of Pennsylvania - Department of Economics
Yale University - Department of Economics
University of Michigan at Ann Arbor - Economics Department; National Bureau of Economic Research (NBER)
January 14, 2006
PIER Working Paper No. 06-002
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
Date posted: January 20, 2006
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