Inferring Labor Income Risk and Partial Insurance From Economic Choices
Fatih Guvenen and
Anthony A. Smith
Econometrica, 2014, vol. 82, 2085-2129
Abstract:
This paper uses the information contained in the joint dynamics of individuals' labor earnings and consumption‐choice decisions to quantify both the amount of income risk that individuals face and the extent to which they have access to informal insurance against this risk. We accomplish this task by using indirect inference to estimate a structural consumption–savings model, in which individuals both learn about the nature of their income process and partly insure shocks via informal mechanisms. In this framework, we estimate (i) the degree of partial insurance, (ii) the extent of systematic differences in income growth rates, (iii) the precision with which individuals know their own income growth rates when they begin their working lives, (iv) the persistence of typical labor income shocks, (v) the tightness of borrowing constraints, and (vi) the amount of measurement error in the data. In implementing indirect inference, we find that an auxiliary model that approximates the true structural equations of the model (which are not estimable) works very well, with negligible small sample bias. The main substantive findings are that income shocks are moderately persistent, systematic differences in income growth rates are large, individuals have substantial amounts of information about their income growth rates, and about one‐half of income shocks are smoothed via partial insurance. Putting these findings together, the amount of uninsurable lifetime income risk that individuals perceive is substantially smaller than what is typically assumed in calibrated macroeconomic models with incomplete markets.
Date: 2014
References: Add references at CitEc
Citations: View citations in EconPapers (147)
Downloads: (external link)
http://hdl.handle.net/
Related works:
Working Paper: Inferring labor income risk and partial insurance from economic choices (2013) 
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:wly:emetrp:v:82:y:2014:i::p:2085-2129
Ordering information: This journal article can be ordered from
https://www.economet ... ordering-back-issues
Access Statistics for this article
Econometrica is currently edited by Guido W. Imbens
More articles in Econometrica from Econometric Society Contact information at EDIRC.
Bibliographic data for series maintained by Wiley Content Delivery ().