Working Paper: NBER ID: w22293
Authors: Adriano A. Rampini; S. Viswanathan
Abstract: Households' insurance against shocks to income and asset values (that is, household risk management) is limited, especially for poor households. We argue that a trade-off between intertemporal financing needs and insurance across states explains this basic insurance pattern. In a model with limited enforcement, we show that household risk management is increasing in household net worth and income, incomplete, and precautionary. These results hold in economies with income risk, durable goods and collateral constraints, and durable goods price risk, under quite general conditions and, remarkably, risk aversion is sufficient and prudence is not required. In equilibrium, collateral scarcity lowers the interest rate, reduces insurance, and increases inequality.
Keywords: Household Finance; Risk Management; Income Risk; Collateral Constraints
JEL Codes: D14; D91; E21; G22; I13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Household risk management (G52) | net worth (G19) |
| Household risk management (G52) | income (E25) |
| net worth (G19) | risk management (G22) |
| income (E25) | risk management (G22) |
| limited collateral (G33) | insurance options (G52) |
| collateral constraints (D10) | risk management capabilities (H12) |
| low net worth (D14) | insurance abstention (G52) |
| uncertainty (D89) | precautionary savings (D14) |
| risk aversion (D81) | state-contingent savings (D14) |
| durable goods (L68) | income risk hedging (G52) |
| high-income states (H73) | marginal value of net worth (D14) |