Citation

Discussion Paper Details

Please find the details for DP8701 in an easy to copy and paste format below:

Full Details   |   Bibliographic Reference

Full Details

Title: The wrong shape of insurance? What cross-sectional distributions tell us about models of consumption-smoothing

Author(s): Tobias Broer

Publication Date: December 2011

Keyword(s): Limited Commitment, Risk Sharing and Wealth and Consumption Distribution

Programme Area(s): International Macroeconomics

Abstract: This paper shows how two standard models of consumption risk-sharing - self-insurance through borrowing and saving and limited commitment to insurance contracts - replicate similarly well the standard, second-moment measures of insurance observed in US micro-data. A non-parametric analysis, however, reveals strongly contrasting and counterfactual joint distributions of consumption, income and wealth. Method of moments estimation shows how measurement error in consumption eliminates excessive skewness and concentration of consumption growth. Moreover, counterfactual non-linearities disappear at high estimated risk-aversion under self-insurance, but are a robust feature of limited commitment. Its "shape of insurance" thus argues strongly in favour of the self-insurance model.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=8701

Bibliographic Reference

Broer, T. 2011. 'The wrong shape of insurance? What cross-sectional distributions tell us about models of consumption-smoothing'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=8701