Firm-Related Risk and Precautionary Saving Response
Andreas Fagereng, Luigi Guiso, Luigi Pistaferri
American Economic Review · 2017 · Volume 107 · Issue 5
Abstract
We propose a new approach to identify the strength of the precautionary motive and the extent of self-insurance in response to earnings risk based on Euler equation estimates. To address endogeneity problems, we use Norwegian administrative data and instrument consumption and earnings volatility with the variance of firm-specific shocks. The instrument is valid because firms pass some of their productivity shocks onto wages; moreover, for most workers, firm shocks are hard to avoid. Our estimates suggest a coefficient of relative prudence of 2, in a very plausible range.
Keywords
Firm Behavior: Empirical Analysis, Production, Cost, Capital, Total Factor, and Multifactor Productivity, Capacity, Human Capital, Skills, Occupational Choice, Labor Productivity, Wage Level and Structure, Wage Differentials
Enable JavaScript for citation tools and additional paper interactions.