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Consumption commitments and employment contracts

Archived Abstract of Former PSC Researcher

Postlewaite, A., L. Samuelson, and Daniel Silverman. 2008. "Consumption commitments and employment contracts." Review of Economic Studies, 75(2): 559-578.

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.

DOI:10.1111/j.1467-937X.2008.00472.x (Full Text)

Country of focus: United States.

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