Partial Insurance, Information, and Consumption Dynamics

57 Pages Posted: 15 Jan 2003

See all articles by Richard W. Blundell

Richard W. Blundell

UCL; Centre for Economic Policy Research (CEPR)

Luigi Pistaferri

Centre for Economic Policy Research (CEPR); Stanford University

Ian Preston

University College London - Department of Economics

Date Written: November 2002

Abstract

This Paper uses panel data on household consumption and income to evaluate the degree of insurance to income shocks. Our aim is to describe the transmission of income inequality into consumption inequality. Our framework nests the special cases of self-insurance and the complete markets assumption. We assess the degree of insurance over and above self-insurance through savings by contrasting shifts in the cross-sectional distribution of income growth with shifts in the cross-sectional distribution of consumption growth, and analyse the way these two measures of household welfare correlate over time. We combine panel data on income from the PSID with consumption data from repeated CEX cross-sections in a structural way, i.e. using conventional demand analysis rather than reduced form imputation procedures. Our results point to some partial insurance but reject the complete markets restriction. We find a greater degree of insurance for transitory shocks and differences in the degree of insurance over time and across education. We also document the importance of durables and of taxes and transfers as a means of insurance.

Keywords: Insurance, inequality, consumption

JEL Classification: D52, D90, I30

Suggested Citation

Blundell, Richard W. and Pistaferri, Luigi and Pistaferri, Luigi and Preston, Ian, Partial Insurance, Information, and Consumption Dynamics (November 2002). Available at SSRN: https://ssrn.com/abstract=369540

Richard W. Blundell (Contact Author)

UCL ( email )

Department of Economics
Gower Street
London, WC1E 6BT
United Kingdom
+44 20 7504 5863 (Phone)
+44 20 7916 2773 (Fax)

HOME PAGE: http://www.ucl.ac.uk/~uctp39a/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Luigi Pistaferri

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Stanford University ( email )

Stanford, CA 94305
United States

Ian Preston

University College London - Department of Economics ( email )

Gower Street
London WC1E 6BT, WC1E 6BT
United Kingdom
+44 20 7504 5221 (Phone)
+44 20 7916 2713 (Fax)

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