IDEAS home Printed from https://ideas.repec.org/p/tiu/tiutis/c8da0a17-57cb-40bf-ab61-6608d1ea885a.html
   My bibliography  Save this paper

Consumption Partial Insurance in the Presence of Tail Income Risk

Author

Listed:
  • Ghosh, Anisha
  • Theloudis, Alexandros

    (Tilburg University, School of Economics and Management)

Abstract

We measure the extent of consumption insurance to income shocks accounting for high-order moments of the income distribution. We derive a nonlinear consumption function, in which the extent of insurance varies with the sign and magnitude of income shocks. Using PSID data, we estimate an asymmetric pass-through of bad versus good permanent shocks -- 17% of a 3 sigma negative shock transmits to consumption compared to 9% of an equal-sized positive shock -- and the pass-through increases as the shock worsens. We find similar patterns for transitory shocks among the least wealthy. Households are willing to sacrifice more than 1/8 of lifetime consumption to eliminate tail income risk. Our results are consistent with surveys of consumption responses to hypothetical events and suggest that tail risk matters substantially for consumption.
(This abstract was borrowed from another version of this item.)
(This abstract was borrowed from another version of this item.)
(This abstract was borrowed from another version of this item.)
(This abstract was borrowed from another version of this item.)
(This abstract was borrowed from another version of this item.)
(This abstract was borrowed from another version of this item.)
(This abstract was borrowed from another version of this item.)
(This abstract was borrowed from another version of this item.)
(This abstract was borrowed from another version of this item.)
(This abstract was borrowed from another version of this item.)
(This abstract was borrowed from another version of this item.)
(This abstract was borrowed from another version of this item.)
(This abstract was borrowed from another version of this item.)
(This abstract was borrowed from another version of this item.)
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Ghosh, Anisha & Theloudis, Alexandros, 2023. "Consumption Partial Insurance in the Presence of Tail Income Risk," Other publications TiSEM c8da0a17-57cb-40bf-ab61-6, Tilburg University, School of Economics and Management.
    • Handle: RePEc:tiu:tiutis:c8da0a17-57cb-40bf-ab61-6608d1ea885a
    as

    Download full text from publisher

    File URL: https://pure.uvt.nl/ws/portalfiles/portal/78097033/2023-024.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Arellano, Manuel & Blundell, Richard & Bonhomme, Stéphane & Light, Jack, 2024. "Heterogeneity of consumption responses to income shocks in the presence of nonlinear persistence," Journal of Econometrics, Elsevier, vol. 240(2).
    2. Theloudis, Alexandros, 2021. "Consumption inequality across heterogeneous families," European Economic Review, Elsevier, vol. 136(C).
    3. Fatih Guvenen & Fatih Karahan & Serdar Ozkan & Jae Song, 2021. "What Do Data on Millions of U.S. Workers Reveal About Lifecycle Earnings Dynamics?," Econometrica, Econometric Society, vol. 89(5), pages 2303-2339, September.
    4. Richard Blundell & Hamish Low & Ian Preston, 2013. "Decomposing changes in income risk using consumption data," Quantitative Economics, Econometric Society, vol. 4(1), pages 1-37, March.
    5. Christopher Busch & Alexander Ludwig, 2024. "Higher‐Order Income Risk Over The Business Cycle," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 65(3), pages 1105-1131, August.
    6. George M. Constantinides & Anisha Ghosh, 2017. "Asset Pricing with Countercyclical Household Consumption Risk," Journal of Finance, American Finance Association, vol. 72(1), pages 415-460, February.
    7. Richard Blundell & Ian Preston, 1998. "Consumption Inequality and Income Uncertainty," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 113(2), pages 603-640.
    8. Jonathan A. Parker & Nicholas S. Souleles & David S. Johnson & Robert McClelland, 2013. "Consumer Spending and the Economic Stimulus Payments of 2008," American Economic Review, American Economic Association, vol. 103(6), pages 2530-2553, October.
    9. Stéphane Bonhomme & Jean-Marc Robin, 2010. "Generalized Non-Parametric Deconvolution with an Application to Earnings Dynamics," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 77(2), pages 491-533.
    10. Geweke, John & Keane, Michael, 2000. "An empirical analysis of earnings dynamics among men in the PSID: 1968-1989," Journal of Econometrics, Elsevier, vol. 96(2), pages 293-356, June.
    11. Patricia Andreski & Geng Li & Mehmet Zahid Samancioglu & Robert Schoeni, 2014. "Estimates of Annual Consumption Expenditures and Its Major Components in the PSID in Comparison to the CE," American Economic Review, American Economic Association, vol. 104(5), pages 132-135, May.
    12. Jeanne Commault, 2022. "Does Consumption Respond to Transitory Shocks? Reconciling Natural Experiments and Semistructural Methods," American Economic Journal: Macroeconomics, American Economic Association, vol. 14(2), pages 96-122, April.
    13. Manuel Arellano & Richard Blundell & Stéphane Bonhomme, 2017. "Earnings and Consumption Dynamics: A Nonlinear Panel Data Framework," Econometrica, Econometric Society, vol. 85, pages 693-734, May.
    14. Costas Meghir & Luigi Pistaferri, 2004. "Income Variance Dynamics and Heterogeneity," Econometrica, Econometric Society, vol. 72(1), pages 1-32, January.
    15. Dirk Krueger & Fabrizio Perri, 2006. "Does Income Inequality Lead to Consumption Inequality? Evidence and Theory -super-1," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 73(1), pages 163-193.
    16. Hryshko, Dmytro & Manovskii, Iourii, 2022. "How much consumption insurance in the U.S.?," Journal of Monetary Economics, Elsevier, vol. 130(C), pages 17-33.
    17. Alon Brav & George M. Constantinides & Christopher C. Geczy, 2002. "Asset Pricing with Heterogeneous Consumers and Limited Participation: Empirical Evidence," Journal of Political Economy, University of Chicago Press, vol. 110(4), pages 793-824, August.
    18. Jonathan Heathcote & Kjetil Storesletten & Giovanni L. Violante, 2014. "Consumption and Labor Supply with Partial Insurance: An Analytical Framework," American Economic Review, American Economic Association, vol. 104(7), pages 2075-2126, July.
    19. , 2020. "Why Does Consumption Fluctuate in Old Age and How Should the Government Insure it?," Opportunity and Inclusive Growth Institute Working Papers 40, Federal Reserve Bank of Minneapolis.
    20. Hayashi, Fumio & Altonji, Joseph & Kotlikoff, Laurence, 1996. "Risk-Sharing between and within Families," Econometrica, Econometric Society, vol. 64(2), pages 261-294, March.
    21. Hengjie Ai & Anmol Bhandari, 2021. "Asset Pricing With Endogenously Uninsurable Tail Risk," Econometrica, Econometric Society, vol. 89(3), pages 1471-1505, May.
    22. Cochrane, John H, 1991. "A Simple Test of Consumption Insurance," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 957-976, October.
    23. Chunzan Wu & Dirk Krueger, 2021. "Consumption Insurance against Wage Risk: Family Labor Supply and Optimal Progressive Income Taxation," American Economic Journal: Macroeconomics, American Economic Association, vol. 13(1), pages 79-113, January.
    24. Edmund Crawley & Andreas Kuchler, 2023. "Consumption Heterogeneity: Micro Drivers and Macro Implications," American Economic Journal: Macroeconomics, American Economic Association, vol. 15(1), pages 314-341, January.
    25. De Nardi, Mariacristina & Fella, Giulio & Knoef, Marike & Paz-Pardo, Gonzalo & Van Ooijen, Raun, 2021. "Family and government insurance: Wage, earnings, and income risks in the Netherlands and the U.S," Journal of Public Economics, Elsevier, vol. 193(C).
    26. Attanasio, Orazio & Davis, Steven J, 1996. "Relative Wage Movements and the Distribution of Consumption," Journal of Political Economy, University of Chicago Press, vol. 104(6), pages 1227-1262, December.
    27. Bunn, Philip & Le Roux, Jeanne & Reinold, Kate & Surico, Paolo, 2018. "The consumption response to positive and negative income shocks," Journal of Monetary Economics, Elsevier, vol. 96(C), pages 1-15.
    28. Kanishka Misra & Paolo Surico, 2014. "Consumption, Income Changes, and Heterogeneity: Evidence from Two Fiscal Stimulus Programs," American Economic Journal: Macroeconomics, American Economic Association, vol. 6(4), pages 84-106, October.
    29. Hall, Robert E & Mishkin, Frederic S, 1982. "The Sensitivity of Consumption to Transitory Income: Estimates from Panel Data on Households," Econometrica, Econometric Society, vol. 50(2), pages 461-481, March.
    30. Bruce D. Meyer & James X. Sullivan, 2023. "Consumption and Income Inequality in the United States since the 1960s," Journal of Political Economy, University of Chicago Press, vol. 131(2), pages 247-284.
    31. McKay, Alisdair, 2017. "Time-varying idiosyncratic risk and aggregate consumption dynamics," Journal of Monetary Economics, Elsevier, vol. 88(C), pages 1-14.
    32. Greg Kaplan & Giovanni L. Violante, 2010. "How Much Consumption Insurance beyond Self-Insurance?," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(4), pages 53-87, October.
    33. Fatih Guvenen & Anthony A. Smith, 2014. "Inferring Labor Income Risk and Partial Insurance From Economic Choices," Econometrica, Econometric Society, vol. 82, pages 2085-2129, November.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Edmund Crawley & Alexandros Theloudis, 2024. "Income Shocks and their Transmission into Consumption," Papers 2404.12214, arXiv.org.
    2. Fatih Guvenen & Serdar Ozkan & Rocio Madera, 2024. "Consumption Dynamics and Welfare under Non-Gaussian Earnings Risk," CESifo Working Paper Series 11135, CESifo.
    3. Dirk Krueger & Egor Malkov & Fabrizio Perri, 2023. "How Do Households Respond to Income Shocks?," Staff Report 655, Federal Reserve Bank of Minneapolis.
    4. Christopher Busch & Alexander Ludwig, 2024. "Higher‐Order Income Risk Over The Business Cycle," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 65(3), pages 1105-1131, August.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Crawley, Edmund & Theloudis, Alexandros, 2024. "Income Shocks and their Transmission into Consumption," Discussion Paper 2024-012, Tilburg University, Center for Economic Research.
    2. Theloudis, Alexandros, 2021. "Consumption inequality across heterogeneous families," European Economic Review, Elsevier, vol. 136(C).
    3. Joseph Altonji & Disa Hynsjo & Ivan Vidangos, 2023. "Individual Earnings and Family Income: Dynamics and Distribution," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 49, pages 225-250, July.
    4. Fatih Guvenen & Serdar Ozkan & Rocio Madera, 2024. "Consumption Dynamics and Welfare under Non-Gaussian Earnings Risk," CESifo Working Paper Series 11135, CESifo.
    5. Giulio Fella & Serafin Frache & Winfried Koeniger, 2020. "Buffer‐Stock Saving And Households' Response To Income Shocks," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 61(3), pages 1359-1382, August.
    6. Richard Blundell & Luigi Pistaferri & Itay Saporta-Eksten, 2016. "Consumption Inequality and Family Labor Supply," American Economic Review, American Economic Association, vol. 106(2), pages 387-435, February.
    7. Richard Blundell & Margherita Borella & Jeanne Commault & Mariacristina De Nardi, 2024. "Old Age Risks, Consumption, and Insurance," American Economic Review, American Economic Association, vol. 114(2), pages 575-613, February.
    8. John Carter Braxton & Kyle F. Herkenhoff & Jonathan Rothbaum & Lawrence Schmidt, 2021. "Changing Income Risk across the US Skill Distribution: Evidence from a Generalized Kalman Filter," Opportunity and Inclusive Growth Institute Working Papers 55, Federal Reserve Bank of Minneapolis.
    9. Estelle Dauchy & Francisco Navarro-Sanchez & Nathan Seegert, 2021. "Taxation and Inequality: Active and Passive Channels," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 42, pages 156-177, October.
    10. Jonathan Heathcote & Kjetil Storesletten & Giovanni L. Violante, 2014. "Consumption and Labor Supply with Partial Insurance: An Analytical Framework," American Economic Review, American Economic Association, vol. 104(7), pages 2075-2126, July.
    11. Dirk Krueger & Egor Malkov & Fabrizio Perri, 2023. "How Do Households Respond to Income Shocks?," Staff Report 655, Federal Reserve Bank of Minneapolis.
    12. Manuel Arellano & Richard Blundell & Stéphane Bonhomme, 2017. "Earnings and Consumption Dynamics: A Nonlinear Panel Data Framework," Econometrica, Econometric Society, vol. 85, pages 693-734, May.
    13. Orazio Attanasio & Costas Meghir & Corina Mommaerts, 2015. "Insurance in extended family networks," NBER Working Papers 21059, National Bureau of Economic Research, Inc.
    14. Jonathan Heathcote & Kjetil Storesletten & Giovanni L. Violante, 2009. "Quantitative Macroeconomics with Heterogeneous Households," Annual Review of Economics, Annual Reviews, vol. 1(1), pages 319-354, May.
    15. Manuel Sanchez & Felix Wellschmied, 2020. "Modeling Life-Cycle Earnings Risk with Positive and Negative Shocks," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 37, pages 103-126, July.
    16. Hoffmann, Eran B. & Malacrino, Davide, 2019. "Employment time and the cyclicality of earnings growth," Journal of Public Economics, Elsevier, vol. 169(C), pages 160-171.
    17. Rita Ginja, 2010. "Income Shocks and Investments in Human Capital," 2010 Meeting Papers 1165, Society for Economic Dynamics.
    18. Monteiro, Paulo Santos, 2008. "Testing Full Consumption Insurance in the Frequency Domain," Economic Research Papers 269910, University of Warwick - Department of Economics.
    19. Jeanne Commault, 2016. "How Does Nondurable Consumption Respond To Transitory Income Shocks? Reconciling Natural Experiments and Structural Estimations," Working Papers hal-01328904, HAL.
    20. Manuel Sanchez & Felix Wellschmied, 2020. "Modeling Life-Cycle Earnings Risk with Positive and Negative Shocks," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 37, pages 103-126, July.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:tiu:tiutis:c8da0a17-57cb-40bf-ab61-6608d1ea885a. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Richard Broekman (email available below). General contact details of provider: https://www.tilburguniversity.edu/about/schools/economics-and-management/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.