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Household risk management

Author

Listed:
  • S. Viswanathan

    (Duke University)

  • Adriano Rampini

    (Duke University)

Abstract

Household risk management, that is, households' insurance against adverse shocks to income, assets, and financing needs, is limited and often completely absent, in particular for poor households. We explain this basic pattern in household insurance in an infinite horizon model in which households have access to complete markets subject to collateral constraints resulting in a trade-off between the financing needs for consumption and durable goods purchases and risk management concerns. We show that household risk management is monotone in household net worth and income, under quite general conditions, in economies with income risk, durable goods, and durable goods price risk. The limited participation in markets for claims which allow household risk management is a result of the financing risk management trade-off and should not be considered a puzzle.

Suggested Citation

  • S. Viswanathan & Adriano Rampini, 2013. "Household risk management," 2013 Meeting Papers 647, Society for Economic Dynamics.
    • Handle: RePEc:red:sed013:647
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    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • 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
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private

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