Complete Markets Strikes Back: Is the Reduced-form Measure of Consumption Insurance Reliable?

Gang Sun ()

Review of Economic Dynamics, 2015, vol. 18, issue 4, 921-930

Abstract: This paper highlights the identification problem of the reduced-form approach in quantifying the degree of consumption insurance as in Blundell et al. (2008, BPP thereafter). I argue that the reduced-form estimates are difficult to interpret in terms of the degree of consumption insurance. I show that BBP's empirical estimates of partial insurance parameters are consistent with a complete market model, both qualitatively and quantitatively, if the household income growth rate is positively correlated with patience. I also find that this model can simultaneously match the empirical increase of consumption dispersion over the life cycle. (Copyright: Elsevier)

Keywords: Consumption insurance; Complete markets; Ex ante heterogeneity; Risk sharing (search for similar items in EconPapers)
JEL-codes: D31 D58 D91 E21 (search for similar items in EconPapers)
Date: 2015
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DOI: 10.1016/j.red.2014.12.002

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