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The Wrong Shape of Insurance?: What Cross-Sectional Distributions Tell Us about Models of Consumption Smoothing
Stockholm University, Faculty of Social Sciences, Institute for International Economic Studies.
2013 (English)In: American Economic Journal: Macroeconomics, ISSN 1945-7707, Vol. 5, no 4, 107-140 p.Article in journal (Refereed) Published
Abstract [en]

This paper shows how two standard models of consumption-risk-sharing-self-insurance through borrowing and saving and limited commitment to insurance contracts-replicate similarly well the standard, second-moment measures of insurance observed in US micro data. A nonparametric analysis, however, reveals strongly contrasting and counterfactual joint distributions of consumption, income and wealth. Method of moments estimation shows how measurement error in consumption eliminates excessive skewness and smoothness of consumption growth. Moreover, counterfactual nonlinearities disappear at high-estimated risk aversion under self-insurance, but are a robust feature of limited commitment. Its shape of insurance thus argues in favor of the self-insurance model.

Place, publisher, year, edition, pages
2013. Vol. 5, no 4, 107-140 p.
National Category
Economics and Business
URN: urn:nbn:se:su:diva-95749DOI: 10.1257/mac.5.4.107ISI: 000325424300004OAI: diva2:662270


Available from: 2013-11-06 Created: 2013-11-04 Last updated: 2013-11-06Bibliographically approved

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Broer, Tobias
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