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A Test of Consumption Insurance

  • John H. Cochrane

Are individuals effectively insured against idiosyncratic shocks to income or wealth by either formal or informal mechanisms? This paper shows that under perfect insurance, marginal utility should grow at the same rate for all consumers, and that the distribution of measured consumption growth rates should be independent of variables that are exogenous to the individual consumer when we allow for measurement error in consumption and for variation in preferences. This proposition is tested by cross sectional regressions of individual consumption growth on a variety of variables that should not be correlated with it under perfect insurance, including illness, being fired from a job, etc.

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File URL: http://www.nber.org/papers/w2642.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2642.

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Date of creation: Jul 1988
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Publication status: published as "A Simple Test of Consumption Insurance." From Journal of Political Economy, Vol. 99, No. 5, pp. 957-976, (October 1991).
Handle: RePEc:nbr:nberwo:2642
Note: EFG
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  1. Scheinkman, Jose A & Weiss, Laurence, 1986. "Borrowing Constraints and Aggregate Economic Activity," Econometrica, Econometric Society, vol. 54(1), pages 23-45, January.
  2. Andrew B. Abel & Laurence J. Kotlikoff, 1988. "Does the Consumption of Different Age Groups Move Together? A New Nonparametric Test of Intergenerational Altruism," NBER Working Papers 2490, National Bureau of Economic Research, Inc.
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