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Consumption inequality and partial insurance

Blundell, R.; Pistaferri, L.; Preston, I.; (2004) Consumption inequality and partial insurance. (IFS Working Papers W04/28). Institute for Fiscal Studies: London, UK. Green open access

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Abstract

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.

Type: Working / discussion paper
Title: Consumption inequality and partial insurance
Open access status: An open access version is available from UCL Discovery
Publisher version: http://dx.doi.org/10.1920/wp.ifs.2004.0428
Language: English
Keywords: JEL classification: D52, D91, I30. Consumption, insurance, inequality
UCL classification: UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS > Dept of Economics
URI: https://discovery.ucl.ac.uk/id/eprint/2854
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