Welfare Costs of Idiosyncratic and Aggregate Consumption Shocks

34 Pages Posted: 19 Jul 2021

See all articles by George M. Constantinides

George M. Constantinides

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

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Date Written: July 16, 2021

Abstract

I estimate welfare benefits of eliminating idiosyncratic consumption shocks unrelated to the business cycle as 47.3% of household utility and benefits of eliminating idiosyncratic shocks related to the business cycle as 3.4% of utility. Estimates of the former substantially exceed earlier ones because I distinguish between idiosyncratic shocks related/unrelated to the business cycle, estimate the negative skewness of shocks, target moments of idiosyncratic shocks from household-level CEX data, and target market moments. Benefits of eliminating aggregate shocks are 7.7% of utility. Policy should focus on insuring idiosyncratic shocks unrelated to the business cycle, such as the death of a household’s prime wage earner and job layoffs not necessarily related to recessions.

Keywords: welfare costs of consumption shocks; idiosyncratic consumption shocks; welfare costs of idiosyncratic consumption shocks; incomplete consumption insurance; welfare costs of business cycles

JEL Classification: D31, D52, E32, E44, G01, G12, J6

Suggested Citation

Constantinides, George M., Welfare Costs of Idiosyncratic and Aggregate Consumption Shocks (July 16, 2021). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2021-84, Available at SSRN: https://ssrn.com/abstract=3888331 or http://dx.doi.org/10.2139/ssrn.3888331

George M. Constantinides (Contact Author)

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