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Insuring Consumption Using Income-Linked Assets

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  • Andreas Fuster
  • Paul S. Willen

Abstract

We evaluate financial assets with payoffs linked to individual labor income, as conceived by Shiller (2003) and others. Using a realistically calibrated life-cycle model, we find that such assets can generate nontrivial welfare benefits, depending on the precise structure of the instrument. However, the assets we consider can only eliminate a relatively small fraction of the welfare costs of labor income risk over the life cycle. We highlight the fact that although 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. Copyright 2011, Oxford University Press.

Suggested Citation

  • Andreas Fuster & Paul S. Willen, 2011. "Insuring Consumption Using Income-Linked Assets," Review of Finance, European Finance Association, vol. 15(4), pages 835-873.
  • Handle: RePEc:oup:revfin:v:15:y:2011:i:4:p:835-873
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    2. 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.
    3. S. Viswanathan & Adriano Rampini, 2013. "Household risk management," 2013 Meeting Papers 647, Society for Economic Dynamics.
    4. Rampini, Adriano A. & Viswanathan, S., 2018. "Financing Insurance," CEPR Discussion Papers 12855, C.E.P.R. Discussion Papers.

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    More about this item

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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