A1569
Title: Consumption rigidity, household heterogeneity, and nonmonotonic risk compensation
Authors: Shoka Hayaki - Kobe University (Japan) [presenting]
Abstract: A growing body of evidence documents that aggregate risk compensation declines during weak, high-volatility states, a finding that is difficult to reconcile with standard habit formation models. A mechanism based on heterogeneity in the onset of consumption rigidity is proposed: when households differ in the states at which consumption commitments bind, marginal-utility reweighting generates a transition from countercyclical to procyclical aggregate effective risk aversion. Using postwar U.S. data through 2019, risk compensation peaks near median economic states and subsequently declines as conditions deteriorate, exactly as the mechanism predicts. This pattern is robust across specifications, state variable constructions, and sample periods.
