Consumption Partial Insurance in the Presence of Tail Income Risk

Anisha Ghosh and Alexandros Theloudis

Papers from arXiv.org

Abstract: We propose a simple framework to measure consumption insurance against income shocks that accounts for higher-order moments of the income distribution. We derive a nonlinear consumption function in which the extent of insurance varies with both the sign and magnitude of shocks. Using recent PSID data, we estimate an asymmetric pass-through of bad versus good permanent shocks - 17% of a 3 sigma negative shock transmits to consumption versus 9% of an equal-sized positive shock - with greater pass-through as shocks worsen. These consumption transmission rates further vary by age, wealth, and along the income distribution. Our results align with survey responses to hypothetical events and suggest that tail risk matters substantially for consumption.

Date: 2023-06, Revised 2025-07
New Economics Papers: this item is included in nep-rmg
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Citations: View citations in EconPapers (6)

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Working Paper: Consumption Partial Insurance in the Presence of Tail Income Risk (2023)
Working Paper: Consumption Partial Insurance in the Presence of Tail Income Risk (2023)
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