DP11809 Firm-Related Risk and Precautionary Saving Response
|Author(s):||Andreas Fagereng, Luigi Guiso, Luigi Pistaferri|
|Publication Date:||January 2017|
|Keyword(s):||firm shocks, precautionary savings, self-insurance|
|Programme Areas:||Financial Economics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=11809|
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.