TY  - JOUR
AU  - Chetty,Raj
AU  - Szeidl,Adam
TI  - Consumption Commitments and Risk Preferences
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 12467
PY  - 2006
Y2  - August 2006
UR  - http://www.nber.org/papers/w12467
L1  - http://www.nber.org/papers/w12467.pdf
N1  - Author contact info:
Raj Chetty
Department of Economics
Harvard University
1805 Cambridge St.
Cambridge, MA 02138
Tel: 617-744-9492
E-Mail: chetty@fas.harvard.edu

Adam Szeidl
Department of Economics
Central European University
Nador u. 11
Budapest, Hungary
Tel: +361 327-2000
E-Mail: szeidla@ceu.hu
AB  - Many households devote a large fraction of their budgets to "consumption commitments" -- goods that involve transaction costs and are infrequently adjusted. This paper characterizes risk preferences in an expected utility model with commitments. We show that commitments affect risk preferences in two ways: (1) they amplify risk aversion with respect to moderate-stake shocks and (2) they create a motive to take large-payoff gambles. The model thus helps resolve two basic puzzles in expected utility theory: the discrepancy between moderate-stake and large-stake risk aversion and lottery playing by insurance buyers. We discuss applications of the model such as the optimal design of social insurance and tax policies, added worker effects in labor supply, and portfolio choice. Using event studies of unemployment shocks, we document evidence consistent with the consumption adjustment patterns implied by the model.
ER  -