Welfare Costs of Idiosyncratic and Aggregate Consumption Shocks

George Constantinides

No 29009, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: D31 D52 E2 E21 E24 E32 E44 G01 G12 J6 (search for similar items in EconPapers)
Date: 2021-07
New Economics Papers: this item is included in nep-cwa, nep-lab, nep-mac and nep-upt
Note: AP EFG LS PE
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