Consumption Insurance or Consumption Mobility?
AbstractThe theory of full consumption insurance posits that households are insulated from all idiosyncratic shocks so that the ratio of the marginal utilities of consumption of any two households is constant over time. Consumption insurance therefore implies absence of consumption mobility between any two time periods. This implication requires knowledge of the evolution of the entire consumption distribution, not just its mean as in standard tests of complete markets. We test this unexplored prediction of the theory using a panel drawn from the Bank of Italy Survey of Household Income and Wealth. We design an appropriate non-parametric test and find substantial mobility of consumption even controlling for possible preference shifts and measurement error in consumption. The findings strongly reject the theory of full consumption insurance.
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Bibliographic InfoPaper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 19.
Date of creation: 01 Apr 1999
Date of revision:
Publication status: Published in Journal of the European Economic Association, 2006, vol. 4, pages 75-115
Consumption insurance; mobility;
Other versions of this item:
- D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
- D91 - Microeconomics - - Intertemporal Choice - - - Intertemporal Household Choice; Life Cycle Models and Saving
- I30 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-1999-05-03 (All new papers)
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