Firm-Related Risk and Precautionary Saving Response.
Journal article, Peer reviewed
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Original versionFagereng, Andreas, Luigi Guiso, and Luigi Pistaferri. 2017. "Firm-Related Risk and Precautionary Saving Response." American Economic Review, 107 (5): 393-97. https://doi.org/10.1257/aer.p20171093 https://doi.org/10.1257/aer.p20171093
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.