A Simple Test of Consumption Insurance

John Cochrane

Journal of Political Economy, 1991, vol. 99, issue 5, 957-76

Abstract: Are consumers effectively insured against idiosyncratic shocks to income or wealth, either by formal institutions such as charities, private insurance, and government programs or by informal mechanisms such as gifts and "loans" from relatives, friends, and neighbors? Under full insurance, consumption growth should be cross-sectionally independent of idiosyncratic variables that are exogenous to consumers. This proposition is tested by cross-sectional regressions of consumption growth on a variety of exogenous variables. Full insurance is rejected for long illness and involuntary job loss, but not for spells of unemployment, loss of work due to strike, and an involuntary move. Copyright 1991 by University of Chicago Press.

Date: 1991
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