Working Paper: NBER ID: w2642
Authors: John H. Cochrane
Abstract: Are individuals effectively insured against idiosyncratic shocks to income or wealth by either formal or informal mechanisms? This paper shows that under perfect insurance, marginal utility should grow at the same rate for all consumers, and that the distribution of measured consumption growth rates should be independent of variables that are exogenous to the individual consumer when we allow for measurement error in consumption and for variation in preferences. This proposition is tested by cross sectional regressions of individual consumption growth on a variety of variables that should not be correlated with it under perfect insurance, including illness, being fired from a job, etc.
Keywords: Consumption Insurance; Idiosyncratic Shocks; Marginal Utility
JEL Codes: D91; E21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| idiosyncratic shocks (D89) | individual consumption growth (E20) |
| job loss (J63) | decreased consumption growth (F62) |
| illness (I12) | individual consumption growth (E20) |
| involuntary moves (J62) | individual consumption growth (E20) |
| perfect insurance (D41) | coefficients on shock variables = 0 (C29) |