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The Insurance Value of Public Insurance Against Idiosyncratic Income Risk

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  • Christopher Busch
  • Rocio Madera

Abstract

We introduce a tractable method built around an incomplete-markets model to assess the value of public insurance against permanent idiosyncratic income risk. Our approach translates statistical differences between gross and disposable incomes into a welfare-equivalent variance adjustment. Under homoskedastic Gaussian shocks, the variance ratio of permanent shocks to gross and disposable incomes provides a sufficient statistic for the size of insurance. More generally, with cyclical non-Gaussian shocks, public insurance amounts to a variance reduction by 38-49% in Sweden (tax registers) and 24-31% in the United States (PSID), depending on risk attitudes. Consumption-based measures in the PSID confirm our model-based measure.

Suggested Citation

  • Christopher Busch & Rocio Madera, 2026. "The Insurance Value of Public Insurance Against Idiosyncratic Income Risk," CESifo Working Paper Series 12467, CESifo.
    • Handle: RePEc:ces:ceswps:_12467
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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