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Insuring Consumption Using Income-Linked Assets

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  • Andreas Fuster
  • Paul S. Willen

Abstract

We evaluate financial assets with payoffs linked to individual labor income, as conceived by Shiller (2003) and others. Using a realistically calibrated life-cycle model, we find that such assets can generate nontrivial welfare benefits, depending on the precise structure of the instrument. However, the assets we consider can only eliminate a relatively small fraction of the welfare costs of labor income risk over the life cycle. We highlight the fact that although the purpose of such assets is to smooth consumption across states of nature, one must also consider the assets' effects on households' ability to smooth consumption over time. Copyright 2011, Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/rof/rfr021
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Bibliographic Info

Article provided by European Finance Association in its journal Review of Finance.

Volume (Year): 15 (2011)
Issue (Month): 4 ()
Pages: 835-873

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Handle: RePEc:oup:revfin:v:15:y:2011:i:4:p:835-873

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Cited by:
  1. Jonathan Halket & Santhanagopalan Vasudev, 2014. "Saving Up or Settling Down: Home Ownership over the Life Cycle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 17(2), pages 345-366, April.
  2. Petia Topalova & Shawn Cole & Xavier Gene & Jeremy Tobacman & Robert Townsend & James Vickery, 2011. "Barriers to Household Risk Management: Evidence from India," Working Papers id:4293, eSocialSciences.
  3. Robert M. Townsend & Shawn Cole & Jeremy Tobacman & Xavier Gine & James Ian Vickery & Petia Topalova, 2012. "Barriers to Household Risk Management," IMF Working Papers 12/195, International Monetary Fund.

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