The Wrong Shape of Insurance? What Cross-Sectional Distributions Tell Us about Models of Consumption Smoothing
American Economic Journal: Macroeconomics
vol. 5,
no. 4, October 2013
(pp. 107-40)
Abstract
This paper shows how two standard models of consumption risk-sharing—self-insurance through borrowing and saving and limited commitment to insurance contracts—replicate similarly well the standard, second-moment measures of insurance observed in US micro data. A nonparametric analysis, however, reveals strongly contrasting and counterfactual joint distributions of consumption, income and wealth. Method of moments estimation shows how measurement error in consumption eliminates excessive skewness and smoothness of consumption growth. Moreover, counterfactual nonlinearities disappear at high-estimated risk aversion under selfinsurance, but are a robust feature of limited commitment. Its "shape of insurance" thus argues in favor of the self-insurance model.Citation
Broer, Tobias. 2013. "The Wrong Shape of Insurance? What Cross-Sectional Distributions Tell Us about Models of Consumption Smoothing." American Economic Journal: Macroeconomics, 5 (4): 107-40. DOI: 10.1257/mac.5.4.107Additional Materials
JEL Classification
- D14 Personal Finance
- D81 Criteria for Decision-Making under Risk and Uncertainty
- D15 Intertemporal Consumer Choice; Life Cycle Models and Saving
- E21 Macroeconomics: Consumption; Saving; Wealth
- G22 Insurance; Insurance Companies
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