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Risk Sharing in Private Information Models with Asset Accumulation: Explaining the Excess Smoothness of Consumption

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Author Info
Orazio Attanasio
Nicola Pavoni

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Abstract

We derive testable implications of model in which first best allocations are not achieved because of a moral hazard problem with hidden saving. We show that in this environment agents typically achieve more insurance than that obtained under autarchy via saving, and that consumption allocation gives rise to 'excess smoothness of consumption', as found and defined by Campbell and Deaton (1987). We argue that the evidence on excess smoothness is consistent with a violation of the simple intertemporal budget constraint considered in a Bewley economy (with a single asset) and use techniques proposed by Hansen et al. (1991) to test the intertemporal budget constraint. We also construct closed form examples where the excess smoothness parameter has a structural interpretation in terms of the severity of the moral hazard problem. Evidence from the UK on the dynamic properties of consumption and income in micro data is consistent with the implications of the model.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12994.

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Date of creation: Mar 2007
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Handle: RePEc:nbr:nberwo:12994

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Find related papers by JEL classification:
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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  7. Abraham, Arpad & Pavoni, Nicola, 2004. "Efficient Allocations with Moral Hazard and Hidden Borrowing and Lending," Working Papers 04-05, Duke University, Department of Economics. [Downloadable!]
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  12. Árpád Ábrahám & Nicola Pavoni, 2005. "The Efficient Allocation of Consumption under Moral Hazard and Hidden Access to the Credit Market," Journal of the European Economic Association, MIT Press, vol. 3(2-3), pages 370-381, 04/05. [Downloadable!] (restricted)
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  14. West, Kenneth D., 1988. "The insensitivity of consumption to news about income," Journal of Monetary Economics, Elsevier, vol. 21(1), pages 17-33, January. [Downloadable!] (restricted)
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  22. Orazio Attanasio & Tullio Jappelli, 1998. "Intertemporal Choice and the Cross Sectional Variance of Marginal Utility," CSEF Working Papers 06.1998, Centre for Studies in Economics and Finance (CSEF), University of Salerno, Italy. [Downloadable!]
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  23. Prescott, Edward C & Townsend, Robert M, 1984. "Pareto Optima and Competitive Equilibria with Adverse Selection and Moral Hazard," Econometrica, Econometric Society, vol. 52(1), pages 21-45, January. [Downloadable!] (restricted)
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  26. Ligon, Ethan, 1998. "Risk Sharing and Information in Village Economics," Review of Economic Studies, Blackwell Publishing, vol. 65(4), pages 847-64, October. [Downloadable!] (restricted)
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  1. Orazio Attanasio & Margherita Borella, 2006. "Stochastic Components of Individual Consumption: A Time Series Analysis of Grouped Data," NBER Working Papers 12456, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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