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Advance Information and Consumption Insurance: Evidence from Panel Data

Author

Listed:
  • Marcelo Pedroni

    (University of Amsterdam)

  • Swapnil Singh

    (Bank of Lithuania)

  • Christian Stoltenberg

    (University of Amsterdam)

Abstract

We investigate whether US households possess advance information about their future income and what this means for consumption insurance. Based on insights from a theoretical model, we propose a new test to detect advance information, which requires only panel data on consumption and income. Using the Panel Study of Income Dynamics, we find---in contrast to the existing literature---strong support for the existence of advance information. We use this evidence to estimate a standard incomplete markets model and find that advance information reduces households' income forecast errors by 15%. Our estimation results imply that 27% of all unexpected income changes are passed through to consumption. Ignoring advance information leads to a significant overestimation of consumption insurance and even more so at the bottom of the wealth distribution.

Suggested Citation

  • Marcelo Pedroni & Swapnil Singh & Christian Stoltenberg, 2022. "Advance Information and Consumption Insurance: Evidence from Panel Data," Tinbergen Institute Discussion Papers 22-032/VI, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20220032
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    References listed on IDEAS

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    Cited by:

    1. Christian Stoltenberg & Arne Uhlendorff, 2022. "Consumption Choices and Earnings Expectations: Empirical Evidence and Structural Estimation," Tinbergen Institute Discussion Papers 22-049/VI, Tinbergen Institute.

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    More about this item

    Keywords

    income risk; advance information; consumption insurance; panel data; incomplete markets;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G52 - Financial Economics - - Household Finance - - - Insurance

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