NBER

Andreas Fagereng, Luigi Guiso, Luigi Pistaferri

Bibliographic Information

NBER Working Paper No. 23182
Issued in February 2017
NBER Program(s):EFG, LS

Published: Andreas Fagereng & Luigi Guiso & Luigi Pistaferri, 2017. "Firm-Related Risk and Precautionary Saving Response," American Economic Review, American Economic Association, vol. 107(5), pages 393-397, May. citation courtesy of

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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.

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