Commitment, Risk, and Consumption: Do Birds of a Feather Have Bigger Nests?

60 Pages Posted: 15 Aug 2005

See all articles by Stephen H. Shore

Stephen H. Shore

Georgia State University

Todd M. Sinai

University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER)

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Date Written: August 3, 2005

Abstract

We show that incorporating consumption commitments into a standard model of precautionary saving can complicate the usual relationship between risk and consumption. In particular, the presence of plausible adjustment costs can cause a mean-preserving increase in unemployment risk to lead to increased consumption. The predictions of this model are consistent with empirical evidence from dual-earning couples. Couples who share an occupation face increased risk as their unemployment shocks are more highly correlated. Such couples spend more on owner-occupied housing than other couples, spend no more on rent, and are more likely to rent than own. This pattern is strongest when the household faces higher moving costs, or when unemployment insurance provides a less generous safety net.

Keywords: Precautionary saving, commitment, income risk, unemployment, housing

JEL Classification: E21, R21, D8

Suggested Citation

Shore, Stephen H. and Sinai, Todd M., Commitment, Risk, and Consumption: Do Birds of a Feather Have Bigger Nests? (August 3, 2005). Available at SSRN: https://ssrn.com/abstract=780547 or http://dx.doi.org/10.2139/ssrn.780547

Stephen H. Shore

Georgia State University ( email )

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Todd M. Sinai (Contact Author)

University of Pennsylvania - The Wharton School ( email )

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