Working Paper: CEPR ID: DP3666
Authors: Richard Blundell; Luigi Pistaferri; Ian Preston
Abstract: This Paper uses panel data on household consumption and income to evaluate the degree of insurance to income shocks. Our aim is to describe the transmission of income inequality into consumption inequality. Our framework nests the special cases of self-insurance and the complete markets assumption. We assess the degree of insurance over and above self-insurance through savings by contrasting shifts in the cross-sectional distribution of income growth with shifts in the cross-sectional distribution of consumption growth, and analyse the way these two measures of household welfare correlate over time. We combine panel data on income from the PSID with consumption data from repeated CEX cross-sections in a structural way, i.e. using conventional demand analysis rather than reduced form imputation procedures. Our results point to some partial insurance but reject the complete markets restriction. We find a greater degree of insurance for transitory shocks and differences in the degree of insurance over time and across education. We also document the importance of durables and of taxes and transfers as a means of insurance.
Keywords: consumption; inequality; insurance
JEL Codes: D52; D90; I30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| transitory income shocks (J69) | partial insurance (G52) |
| permanent income shocks (G59) | less insurability (G52) |
| variance of consumption growth (F62) | variance of permanent income shocks (D11) |
| education levels (I24) | insurance against income shocks (G52) |
| durable goods (L68) | smoothing consumption (D15) |
| taxes and transfers (H29) | insurance against permanent income shocks (G52) |