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Limited participation and consumption-saving puzzles: A simple explanation and the role of insurance

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  • Gormley, Todd
  • Liu, Hong
  • Zhou, Guofu

Abstract

In this paper, we show that the existence of a large, negative wealth shock and insufficient insurance against such a shock could explain both the limited stock market participation puzzle and the low-consumption-high-savings puzzle. We then conduct an empirical analysis on the relation between household portfolio choices and access to private insurance and various types of government safety nets. The empirical results demonstrate that a lack of insurance against large, negative wealth shocks is positively correlated with lower participation rates and higher saving rates. Overall, the evidence suggests an important role of insurance in household investment and savings decisions.

Suggested Citation

  • Gormley, Todd & Liu, Hong & Zhou, Guofu, 2010. "Limited participation and consumption-saving puzzles: A simple explanation and the role of insurance," Journal of Financial Economics, Elsevier, vol. 96(2), pages 331-344, May.
  • Handle: RePEc:eee:jfinec:v:96:y:2010:i:2:p:331-344
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    References listed on IDEAS

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    Cited by:

    1. Agrawal, Ashwini K. & Matsa, David A., 2013. "Labor unemployment risk and corporate financing decisions," LSE Research Online Documents on Economics 69608, London School of Economics and Political Science, LSE Library.
    2. Agrawal, Ashwini K. & Matsa, David A., 2013. "Labor unemployment risk and corporate financing decisions," Journal of Financial Economics, Elsevier, vol. 108(2), pages 449-470.
    3. Francesco D'Acunto & Marcel Prokopczuk & Michael Weber, 2017. "Historical Antisemitism, Ethnic Specialization, and Financial Development," CESifo Working Paper Series 6643, CESifo Group Munich.
    4. Joanne W. Hsu & David A. Matsa & Brian T. Melzer, 2014. "Positive Externalities of Social Insurance: Unemployment Insurance and Consumer Credit," NBER Working Papers 20353, National Bureau of Economic Research, Inc.
    5. Jang, Bong-Gyu & Park, Seyoung & Rhee, Yuna, 2013. "Optimal retirement with unemployment risks," Journal of Banking & Finance, Elsevier, vol. 37(9), pages 3585-3604.
    6. Peter Chinloy & Daniel Winkler, 2012. "Contracts, Individual Revenue and Performance," Journal of Labor Research, Springer, vol. 33(4), pages 545-562, December.

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