Attitudes towards income risk in the presence of quantity constraints

Schroyen, Fred
(2011)

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  • Schroyen, FredNorwegian School of Economics
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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 perform a global numerical analysis of these effects. I conclude that quantity constraints have counter-intuitive and pronounced non-linear effects on risk attitudes.
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Schroyen, F. (2011). Attitudes towards income risk in the presence of quantity constraints (CORE Discussion Paper 2011/20). https://hdl.handle.net/2078.5/209013