Discussion Paper Details

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Title: Firm-Related Risk and Precautionary Saving Response

Author(s): Andreas Fagereng, Luigi Guiso and Luigi Pistaferri

Publication Date: January 2017

Keyword(s): firm shocks, precautionary savings and self-insurance

Programme Area(s): Financial Economics

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.

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Bibliographic Reference

Fagereng, A, Guiso, L and Pistaferri, L. 2017. 'Firm-Related Risk and Precautionary Saving Response'. London, Centre for Economic Policy Research.