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Attitudes Towards Income Risk in the Presence of Quantity Constraints*

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  • Fred Schroyen

    (Department of Economics, Norwegian School of Economics, Helleveien 30, Bergen N-5045, Norway.)

Abstract

Considering a consumer with standard preferences, I trace out how quantity constraints on markets impact on relative risk aversion and prudence. I first show how this impact decomposes into a local curvature effect and an endogenously changing risk aversion/prudence effect. Next, I calibrate both effects on relative risk aversion and prudence, using estimates on household demand for durables and labour supply. The calibrations show that commitments to durable goods have large effects on attitudes towards risk. And while small wedges between realised and desired levels of labour supply have only moderate effects, becoming full time unemployed on a 60 per cent unemployment benefit significantly raises risk aversion and prudence.

Suggested Citation

  • Fred Schroyen, 2013. "Attitudes Towards Income Risk in the Presence of Quantity Constraints*," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 38(2), pages 183-209, September.
    • Handle: RePEc:pal:genrir:v:38:y:2013:i:2:p:183-209
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    Cited by:

    1. Jean-François Outreville, 2014. "The Meaning of Risk? Insights from The Geneva Risk and Insurance Review," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 39(4), pages 768-781, October.

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