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Department of Economics, Norwegian School of Economics (NHH) Discussion Paper Series in Economics, Department of Economics, Norwegian School of Economics (NHH)

No 7/2011:
Attitudes towards income risk in the presence of quantity constraints.

Fred Schroyen ()

Abstract: Considering a consumer with standard preferences, I trace out the consequences for risk aversion and prudence of quantity constraints on markets. I first show how the effect can be decomposed into a price risk effect and an endogenously changing risk aversion/prudence effect. Next, I calibrate locally both effects on relative risk aversion and prudence, using estimates on household demand for durables and labour supply. Finally, I performa global numerical analysis of these effects. I conclude that quantity constraints have counter-intuitive and pronounced non-linear effects on risk attitudes.

Keywords: Household demand; income risk aversion; prudence; quantity constraints; labour supply.; (follow links to similar papers)

JEL-Codes: D11; D81; (follow links to similar papers)

39 pages, April 7, 2011

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