Advance Information and Consumption Insurance: Evidence from Panel Data

Marcelo Pedroni, Swapnil Singh and Christian Stoltenberg
Additional contact information
Swapnil Singh: Bank of Lithuania
Christian Stoltenberg: University of Amsterdam

No 22-032/VI, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: We investigate whether US households possess advance information about their future income and what this means for consumption insurance. Based on insights from a theoretical model, we propose a new test to detect advance information, which requires only panel data on consumption and income. Using the Panel Study of Income Dynamics, we find---in contrast to the existing literature---strong support for the existence of advance information. We use this evidence to estimate a standard incomplete markets model and find that advance information reduces households' income forecast errors by 15%. Our estimation results imply that 27% of all unexpected income changes are passed through to consumption. Ignoring advance information leads to a significant overestimation of consumption insurance and even more so at the bottom of the wealth distribution.

Keywords: income risk; advance information; consumption insurance; panel data; incomplete markets (search for similar items in EconPapers)
JEL-codes: C23 D12 D31 D52 D81 E21 G52 (search for similar items in EconPapers)
Date: 2022-04-15
New Economics Papers: this item is included in nep-ias and nep-mac
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20220032

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