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Income and Consumption Smoothing Among US States: Regions or Clubs?

Bent Sorensen and Oved Yosha

No 1670, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We measure the amount of income insurance and cross-sectional consumption smoothing (lending and borrowing) achieved within subgroups of states, such as regions or clubs, e.g. the club of rich states. We find that there is as much income insurance between, as well as within, regions. By contrast, consumption smoothing occurs mainly within regions but not between regions, suggesting that capital markets transcend regional barriers while credit markets are regional in their nature. Smoothing within the club of rich states is accomplished mainly via capital markets whereas consumption smoothing is dominant within the club of poor states. The fraction of a shock to gross state product smoothed by the federal tax-transfer system is the same for various regions and other clubs of states. We calculate the scope for consumption smoothing within various regions and clubs, finding that most gains from risk sharing can be achieved within US regions. Since a considerable fraction of shocks to gross state product are smoothed within regions, we conclude that existing markets achieve a substantial fraction of the potential welfare gains from interstate income and consumption smoothing. Nonetheless, non-negligible welfare gains may be obtained from further improvement of risk sharing institutions.

Keywords: Capital Markets; Consumption Smoothing; Credit Markets; Federal Government Insurance; Regional Risk Sharing; Welfare Gains (search for similar items in EconPapers)
JEL-codes: D52 E21 E32 E44 E60 F36 G15 R50 (search for similar items in EconPapers)
Date: 1997-07
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Related works:
Working Paper: Income and ConsumptionSmoothing Among U.S. States: Regions or Clubs? (1996)
Working Paper: Income and Consumption Smoothing among US States: Regions or Clubs? (1996)
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