The Wrong Shape of Insurance? What Cross-Sectional Distributions Tell Us about Models of Consumption Smoothing

Tobias Broer

American Economic Journal: Macroeconomics, 2013, vol. 5, issue 4, 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.

JEL-codes: D14 D81 D91 E21 G22 (search for similar items in EconPapers)
Date: 2013
Note: DOI: 10.1257/mac.5.4.107
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Citations: View citations in EconPapers (27)

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Working Paper: The wrong shape of insurance? What cross-sectional distributions tell us about models of consumption-smoothing (2011)
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