Blundell, R; Pistaferri, L; Preston, I; (2002) Partial insurance, information,and consumption dynamics. (IFS Working Papers W02/16 ). The Institute for Fiscal Studies, UCL (University College London), The Institute for Fiscal Studies: London, UK.

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Abstract

This paper uses panel data on household consumption and income to evaluate the degree ofinsurance to income shocks. Our aim is to describe the transmission of income inequality intoconsumption inequality. Our framework nests the special cases of self-insurance and the completemarkets assumption. We assess the degree of insurance over and above self-insurance throughsavings by contrasting shifts in the cross-sectional distribution of income growth with shifts in thecross-sectional distribution of consumption growth, and analyzing the way these two measures ofhousehold welfare correlate over time. We combine panel data on income from the PSID withconsumption data from repeated CEX cross-sections in a structural way, i.e. using conventionaldemand analysis rather than reduced form imputation procedures. Our results point to some partialinsurance but reject the complete markets restriction. We find a greater degree of insurance fortransitory shocks and differences in the degree of insurance over time and across education. Wealso document the importance of durables and of taxes and transfers as a means of insurance. This paper uses panel data on household consumption and income to evaluate the degree ofinsurance to income shocks. Our aim is to describe the transmission of income inequality intoconsumption inequality. Our framework nests the special cases of self-insurance and the completemarkets assumption. We assess the degree of insurance over and above self-insurance throughsavings by contrasting shifts in the cross-sectional distribution of income growth with shifts in thecross-sectional distribution of consumption growth, and analyzing the way these two measures ofhousehold welfare correlate over time. We combine panel data on income from the PSID withconsumption data from repeated CEX cross-sections in a structural way, i.e. using conventionaldemand analysis rather than reduced form imputation procedures. Our results point to some partialinsurance but reject the complete markets restriction. We find a greater degree of insurance fortransitory shocks and differences in the degree of insurance over time and across education. Wealso document the importance of durables and of taxes and transfers as a means of insurance.

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