Complete Markets Strikes Back: Revisiting Risk Sharing Tests under Discount Rate Heterogeneity
AbstractRecent risk sharing tests strongly reject the hypothesis of complete markets, because in the data: (1) the individual consumption comoves with income and (2) the consumption dispersion increases over the life cycle. In this paper, I revisit the implications of these risk sharing tests in the context of a complete market model with discount rate heterogeneity, which is extended to introduce the individual choices of effort in education. I .nd that a complete market model with discount rate heterogeneity can pass both types of the risk sharing tests. The endogenous positive correlation between income growth rate and patience makes the individual consumption comove with income, even if the markets are complete. I also show that this model is quantitatively admissible to account for both the observed comovement of consumption and income and the increase of consumption dispersion over the life cycle.
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Bibliographic InfoPaper provided by Scottish Institute for Research in Economics (SIRE) in its series SIRE Discussion Papers with number 2013-96.
Date of creation: 2013
Date of revision:
complete markets; discount rate heterogeneity; risk sharing;
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- Gang Sun, .
"Consumption Inequality and Discount Rate Heterogeneity,"
Discussion Paper Series, Department of Economics
201318, Department of Economics, University of St. Andrews.
- Gang Sun, . "Consumption Inequality and Discount Rate Heterogeneity," CDMA Working Paper Series 201311, Centre for Dynamic Macroeconomic Analysis.
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