How much consumption insurance beyond self-insurance?
By: Greg Kaplan, Giovanni L. Violante.
Contributors: Violante, Giovanni L.; National Bureau of Economic Research.
Series: NBER working paper series -- working paper 15553; Working paper series (National Bureau of Economic Research : Online) -- working paper no. 15553.
Publisher: National Bureau of Economic Research
Published: 2009
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Description: "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 Blundell et al.  (2008) (BPP hereafter).  We find that households in the model have access to less consumption-smoothing against permanent earnings shocks than what is measured in the data.  BPP estimate that 36% of permanent shocks are insurable (i.e., do not translate into consumption growth), whereas the model's counterpart of the BPP estimator varies between 7% and 22%, depending on the tightness of debt limits.  In the model, the age profile of the insurance coefficient is sharply increasing, whereas BPP find no clear age slope in their estimate.  Allowing for a plausible degree of "advance information" about future earnings does not reconcile the model-data gap.  If earnings shocks display mean reversion, even with very high autocorrelation, then the average degree of consumption smoothing in the model agrees with the BPP empirical estimate, but its age profile remains steep.  Finally, we show that the BPP estimator of the true insurance coefficient has, in general, a downward bias that grows as borrowing limits become tighter"--National Bureau of Economic Research web site.
Notes: Title from PDF file as viewed on 12/22/2009.

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