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Limited participation and consumption-saving puzzles: A simple explanation and the role of insurance

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  • Gormley, Todd
  • Liu, Hong
  • Zhou, Guofu

Abstract

In this paper, we show that the existence of a large, negative wealth shock and insufficient insurance against such a shock could explain both the limited stock market participation puzzle and the low-consumption-high-savings puzzle. We then conduct an empirical analysis on the relation between household portfolio choices and access to private insurance and various types of government safety nets. The empirical results demonstrate that a lack of insurance against large, negative wealth shocks is positively correlated with lower participation rates and higher saving rates. Overall, the evidence suggests an important role of insurance in household investment and savings decisions.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 96 (2010)
Issue (Month): 2 (May)
Pages: 331-344

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Handle: RePEc:eee:jfinec:v:96:y:2010:i:2:p:331-344

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Web page: http://www.elsevier.com/locate/inca/505576

Related research

Keywords: Limited participation Insurance Saving Consumption;

References

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Citations

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Cited by:
  1. Jang, Bong-Gyu & Park, Seyoung & Rhee, Yuna, 2013. "Optimal retirement with unemployment risks," Journal of Banking & Finance, Elsevier, vol. 37(9), pages 3585-3604.
  2. Agrawal, Ashwini K. & Matsa, David A., 2013. "Labor unemployment risk and corporate financing decisions," Journal of Financial Economics, Elsevier, Elsevier, vol. 108(2), pages 449-470.
  3. Peter Chinloy & Daniel Winkler, 2012. "Contracts, Individual Revenue and Performance," Journal of Labor Research, Springer, vol. 33(4), pages 545-562, December.
  4. Joanne W. Hsu & David A. Matsa & Brian T. Melzer, 2014. "Positive Externalities of Social Insurance: Unemployment Insurance and Consumer Credit," NBER Working Papers 20353, National Bureau of Economic Research, Inc.

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