Heterogeneity, Risk Sharing and the Welfare Costs of Risk
How well do people share risk? Do non-market institutions – charity, progressive taxes, transfer payments – make up for the lack of complete insurance markets? Or is risk sharing far worse than what complete markets could achieve? Standard risk-sharing regressions assume that any variation in households’ risk preferences is uncorrelated with variation in income. I combine administrative and survey data with a simple model of imperfect insurance to show that this assumption fails; risk-tolerant workers sort into jobs where earnings carry more aggregate risk. The correlation makes previous risk-sharing regressions too pessimistic. I provide techniques that eliminate the bias, apply them to U.S. data, and find that the welfare losses from uninsured shocks are practically small and statistically difficult to distinguish from zero. In addition, because more risk-tolerant people bear more aggregate risk, the welfare costs of macroeconomic fluctuations are small even for arbitrarily risk-averse households. There is little room to improve households’ welfare by smoothing idiosyncratic or aggregate shocks unless smoothing shocks also raises mean output.
To our knowledge, this item is not available for
download. To find whether it is available, there are three
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
|Date of creation:||2007|
|Contact details of provider:|| Postal: Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA|
Web page: http://www.EconomicDynamics.org/
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:red:sed007:926. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann)
If references are entirely missing, you can add them using this form.