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Complete Markets Strikes Back: Is the Reduced-form Measure of Consumption Insurance Reliable?

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  • Gang Sun

    (University of St. Andrews)

Abstract

This paper highlights the identification problem of the reduced-form approach in quantifying the degree of consumption insurance as in Blundell et al. (2008, BPP thereafter). I argue that the reduced-form estimates are difficult to interpret in terms of the degree of consumption insurance. I show that BBP's empirical estimates of partial insurance parameters are consistent with a complete market model, both qualitatively and quantitatively, if the household income growth rate is positively correlated with patience. I also find that this model can simultaneously match the empirical increase of consumption dispersion over the life cycle. (Copyright: Elsevier)

Suggested Citation

  • Gang Sun, 2015. "Complete Markets Strikes Back: Is the Reduced-form Measure of Consumption Insurance Reliable?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(4), pages 921-930, October.
    • Handle: RePEc:red:issued:13-56
    DOI: 10.1016/j.red.2014.12.002
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    More about this item

    Keywords

    Consumption insurance; Complete markets; Ex ante heterogeneity; Risk sharing;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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