%0 Generic
%A Blundell, R.
%A Pistaferri, L.
%A Preston, I.
%C London, UK
%D 2004
%F discovery:2854
%I Institute for Fiscal Studies
%K JEL classification: D52, D91, I30. Consumption, insurance, inequality
%N W04/28
%T Consumption inequality and partial insurance
%U https://discovery.ucl.ac.uk/id/eprint/2854/
%X This paper examines the transmission of income inequality into consumption inequality and in  so doing investigates the degree of insurance to income shocks. Panel data on income from the  PSID is combined with consumption data from repeated CEX cross-sections to identify the degree  of insurance to permanent and transitory shocks. In the process we also present new evidence of  the growth in the variance of permanent and transitory shocks in the US during the 1980s. We find  some partial insurance of permanent income shocks with more insurance possibilities for the college  educated and those nearing retirement. We find little evidence against full insurance for transitory  income shocks except among low income households. Tax and welfare benefits are found to play  an important role in insuring permanent shocks. Adding durable expenditures to the consumption  measure suggests that durable replacement is an important insurance mechanism, especially for  transitory income shocks.