Insuring Consumption Using Income-Linked Assets
AbstractShiller (2003) and others have argued for the creation of financial instruments that allow individuals to insure risks associated with their lifetime labor income. In this paper, we argue that while 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. We show that consumers in a realistically calibrated life-cycle model would generally prefer income-linked loans (with a rate positively correlated with income shocks) to an income-hedging instrument (a limited liability asset whose returns correlate negatively with income shocks) even though the assets offer identical opportunities to smooth consumption across states. While for some parameterizations of our model the welfare gains from the presence of income-linked assets can be substantial (above 1% of certainty-equivalent consumption), the assets we consider can only mitigate a relatively small part of the welfare costs of labor income risk over the life cycle.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15829.
Date of creation: Mar 2010
Date of revision:
Publication status: published as Andreas Fuster & Paul S. Willen, 2011. "Insuring Consumption Using Income-Linked Assets," Review of Finance, European Finance Association, vol. 15(4), pages 835-873.
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Web page: http://www.nber.org
More information through EDIRC
Other versions of this item:
- D91 - Microeconomics - - Intertemporal Choice - - - Intertemporal Household Choice; Life Cycle Models and Saving
- E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Shawn Cole & Xavier Giné & Jeremy Tobacman & Petia Topalova & Robert Townsend & James Vickery, 2009.
"Barriers to household risk management: evidence from India,"
Staff Reports, Federal Reserve Bank of New York
373, Federal Reserve Bank of New York.
- Shawn Cole & Xavier Gine & Jeremy Tobacman & Petia Topalova & Robert Townsend & James Vickery, 2013. "Barriers to Household Risk Management: Evidence from India," American Economic Journal: Applied Economics, American Economic Association, American Economic Association, vol. 5(1), pages 104-35, January.
- 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.
- Cole, Shawn & Gine, Xavier & Tobacman, Jeremy & Topalova, Petia & Townsend, Robert & Vickery, James, 2010. "Barriers to household risk management : evidence from India," Policy Research Working Paper Series 5504, The World Bank.
- 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.
- Jonathan Halket & Santhanagopalan Vasudev, 2013. "Code and data files for "Saving Up or Settling Down: Home Ownership over the Life Cycle"," Computer Codes 12-89, Review of Economic Dynamics.
- Jonathan Halket & Santhanagopalan Vasudev, 2013. "Online Appendix to "Saving Up or Settling Down: Home Ownership over the Life Cycle," Technical Appendices 12-89, Review of Economic Dynamics.
- 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.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.