Firm-Related Risk and Precautionary Saving Response

Andreas Fagereng, Luigi Guiso, Luigi Pistaferri

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

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Year of publication:	February 2017
Authors:	Fagereng, Andreas
Other Persons:	Guiso, Luigi (contributor) ; Pistaferri, Luigi (contributor)
Institutions:	National Bureau of Economic Research (contributor)
Publisher:	Cambridge, Mass : National Bureau of Economic Research
Subject:	Sparen \| Savings \| Risiko \| Risk \| Theorie \| Theory \| Vorsichtssparen \| Precautionary saving

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