We show that incorporating consumption commitments into a standard model of precautionary saving can complicate the usual relationship between risk and consumption. In particular, we present a model where 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.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
11588.
Length: Date of creation: Aug 2005 Date of revision: Handle: RePEc:nbr:nberwo:11588
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Find related papers by JEL classification: E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth R21 - Urban, Rural, and Regional Economics - - Household Analysis - - - Housing Demand D8 - Microeconomics - - Information, Knowledge, and Uncertainty
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