Consumption commitments and employment contracts

Andrew Postlewaite, Larry Samuelson, Dan Silverman

Research output: Contribution to journalArticle

19 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)559-578
Number of pages20
JournalReview of Economic Studies
Volume75
Issue number2
DOIs
StatePublished - Apr 1 2008
Externally publishedYes

ASJC Scopus subject areas

  • Economics and Econometrics

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