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

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  • Broer, Tobias
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    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.

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    Bibliographic Info

    Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8701.

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    Date of creation: Dec 2011
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    Handle: RePEc:cpr:ceprdp:8701

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    Related research

    Keywords: Limited Commitment; Risk Sharing; Wealth and Consumption Distribution;

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    Cited by:
    1. Xavier Mateos-Planas & Giulio Seccia, 2013. "Consumer Default with Complete Markets: Default-based Pricing and Finite Punishment," Working Papers 711, Queen Mary, University of London, School of Economics and Finance.

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