Household welfare, precautionary saving, and social insurance under multiple sources of risk

Ivan Vidangos
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Ivan Vidangos: https://www.federalreserve.gov/econres/ivan-vidangos.htm

No 2009-14, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: This paper assesses the quantitative importance of a number of sources of income risk for household welfare and precautionary saving. To that end I construct a lifecycle consumption model in which household income is subject to shocks associated with disability, health, unemployment, job changes, wages, work hours, and a residual component of household income. I use PSID data to estimate the key processes that drive and affect household income, and then use the consumption model to: (i) quantify the welfare value to consumers of providing full, actuarially fair insurance against each source of risk and (ii) measure the contribution of each type of shock to the accumulation of precautionary savings. I find that the value of fully insuring disability, health, and unemployment shocks is extremely small (well below 1/10 of 1 percent of lifetime consumption in the baseline model). The gains from insuring shocks to the wage and to the residual component of household income are significantly larger (above 1% and 2% of lifetime consumption, respectively). These two shocks account for more than 60% of precautionary wealth.

Keywords: Income; Households; Saving and investment (search for similar items in EconPapers)
Date: 2009
New Economics Papers: this item is included in nep-dge, nep-ias and nep-lab
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2009-14

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