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The Value of Public Insurance Against Idiosyncratic Income Risk: A Variance-Adjustment Statistic

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  • Busch, Christopher
  • Madera, Rocio

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

  • Busch, Christopher & Madera, Rocio, 2026. "The Value of Public Insurance Against Idiosyncratic Income Risk: A Variance-Adjustment Statistic," CEPR Discussion Papers 21129, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:21129
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    File URL: https://cepr.org/publications/DP21129
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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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