How Much Consumption Insurance Beyond Self-Insurance?

Greg Kaplan · Giovanni L. Violante

296 citations0/0 files storedAmerican Economic Journal Macroeconomics

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Financial Literacy, Pension, Retirement Analysis Income, Poverty, and Inequality Economic theories and models

Abstract

We assess the degree of consumption smoothing implicit in a calibrated life-cycle version of the standard incomplete-markets model, and we compare it to the empirical estimates of Richard Blundell, Luigi Pistaferri, and Ian Preston (2008) (BPP hereafter) on US data. Households in the data have access to more consumption insurance against permanent earnings shocks than in the model. BPP estimate that 36 percent of permanent shocks are insurable, whereas the model's counterpart of the BPP estimator varies between 7 percent and 22 percent, depending on the tightness of debt limits. We also show that the BPP estimator has a downward bias that grows as borrowing limits become tighter. (JEL D31, D91, E21).

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References

1990Precautionary Saving in the Small and in the Large 1997Buffer-Stock Saving and the Life Cycle/Permanent Income Hypothesis 1991Saving and Liquidity Constraints 1989Precautionary Saving in the Small and in the Large 1989Saving and Liquidity Constraints 1993The risk-free rate in heterogeneous-agent incomplete-insurance economies 1995Precautionary Saving and Social Insurance 1991A Simple Test of Consumption Insurance

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