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Consumption Partial Insurance in the Presence of Tail Income Risk

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  • Ghosh, Anisha
  • Theloudis, Alexandros

    (Tilburg University, Center For Economic Research)

Abstract

We measure the extent of consumption insurance to income shocks accounting for high-order moments of the income distribution. We derive a nonlinear consumption function, in which the extent of insurance varies with the sign and magnitude of income shocks. Using PSID data, we estimate an asymmetric pass-through of bad versus good permanent shocks -- 17% of a 3 sigma negative shock transmits to consumption compared to 9% of an equal-sized positive shock -- and the pass-through increases as the shock worsens. Our results are consistent with surveys of consumption responses to hypothetical events and suggest that tail income risk matters substantially for consumption.
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Suggested Citation

  • Ghosh, Anisha & Theloudis, Alexandros, 2023. "Consumption Partial Insurance in the Presence of Tail Income Risk," Discussion Paper 2023-024, Tilburg University, Center for Economic Research.
    • Handle: RePEc:tiu:tiucen:c8da0a17-57cb-40bf-ab61-6608d1ea885a
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    References listed on IDEAS

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    1. Dirk Krueger & Egor Malkov & Fabrizio Perri, 2023. "How Do Households Respond to Income Shocks?," Staff Report 655, Federal Reserve Bank of Minneapolis.

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    Keywords

    Income risk; skewness; kurtosis; comsumption; PSID;
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