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  3. American Economic Review
  4. May 2017
  5. Firm-Related Risk and Precautionary Saving Response

Firm-Related Risk and Precautionary Saving Response

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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.

Citation

Fagereng, Andreas, Luigi Guiso, and Luigi Pistaferri. 2017. "Firm-Related Risk and Precautionary Saving Response." American Economic Review, 107 (5): 393-97. DOI: 10.1257/aer.p20171093

Additional Materials

JEL Classification

  • D22 Firm Behavior: Empirical Analysis
  • D24 Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
  • J24 Human Capital; Skills; Occupational Choice; Labor Productivity
  • J31 Wage Level and Structure; Wage Differentials