EconPapers    
Economics at your fingertips  
 

Insuring Consumption Using Income-Linked Assets

Andreas Fuster () and Paul Willen

No 15829, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Shiller (2003) and others have argued for the creation of financial instruments that allow individuals to insure risks associated with their lifetime labor income. In this paper, we argue that while the purpose of such assets is to smooth consumption across states of nature, one must also consider the assets' effects on households' ability to smooth consumption over time. We show that consumers in a realistically calibrated life-cycle model would generally prefer income-linked loans (with a rate positively correlated with income shocks) to an income-hedging instrument (a limited liability asset whose returns correlate negatively with income shocks) even though the assets offer identical opportunities to smooth consumption across states. While for some parameterizations of our model the welfare gains from the presence of income-linked assets can be substantial (above 1% of certainty-equivalent consumption), the assets we consider can only mitigate a relatively small part of the welfare costs of labor income risk over the life cycle.

JEL-codes: D91 E21 G11 (search for similar items in EconPapers)
Date: 2010-03
Note: EFG
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2) Track citations by RSS feed

Published as Andreas Fuster & Paul S. Willen, 2011. "Insuring Consumption Using Income-Linked Assets," Review of Finance, European Finance Association, vol. 15(4), pages 835-873.

Downloads: (external link)
http://www.nber.org/papers/w15829.pdf (application/pdf)

Related works:
Journal Article: Insuring Consumption Using Income-Linked Assets (2011) Downloads
Working Paper: Insuring consumption using income-linked assets (2010) Downloads
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:nbr:nberwo:15829

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w15829

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().

 
Page updated 2020-07-10
Handle: RePEc:nbr:nberwo:15829