American Economic Review Vol. 107 No. 5 2017

Firm-Related Risk and Precautionary Saving Response

Andreas Fagereng¹; Luigi Guiso²; Luigi Pistaferri³

¹ Research Department, Statistics Norway, Postboks 8131 Dep., NO-0033 Oslo, Norway (e-mail: ) · ² Einaudi Institute for Economics and Finance, Via Sallustiana 62, 00187 Rome, Italy (e-mail: ) · ³ Department of Economics, Stanford University, Stanford, CA 94305 (e-mail: )

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.

DOI

10.1257/aer.p20171093

Volume

107

Issue

5

Pages

393-397

Language

en

Sources

crossref openalex

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