TY  - JOUR
AU  - Kaplan,Greg
AU  - Violante,Giovanni L.
TI  - How Much Consumption Insurance Beyond Self-Insurance?
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 15553
PY  - 2009
Y2  - December 2009
UR  - http://www.nber.org/papers/w15553
L1  - http://www.nber.org/papers/w15553.pdf
N1  - Author contact info:
Greg Kaplan
Department of Economics
University of Pennsylvania
160 McNeil Building
3718 Locust Walk
Philadelphia, PA 19104
Tel: 215/898-1875
E-Mail: gkaplan@sas.upenn.edu

Giovanni L. Violante
Department of Economics
New York University
19 W. 4th Street
New York, NY 10012-1119
Tel: 212/992-9771
Fax: 212/995-3932
E-Mail: glv2@nyu.edu
AB  - We assess the degree of consumption smoothing implicit in a calibrated life-cycle version of the standard incomplete-markets model, and we compare it to the empirical estimates of Blundell et al. (2008) (BPP hereafter). We find that households in the model have access to less consumption-smoothing against permanent earnings shocks than what is measured in the data. BPP estimate that 36% of permanent shocks are insurable (i.e., do not translate into consumption growth), whereas the model’s counterpart of the BPP estimator varies between 7% and 22%, depending on the tightness of debt limits. In the model, the age profile of the insurance coefficient is sharply increasing, whereas BPP find no clear age slope in their estimate. Allowing for a plausible degree of “advance information” about future earnings does not reconcile the model-data gap. If earnings shocks display mean reversion, even with very high autocorrelation, then the average degree of consumption smoothing in the model agrees with the BPP empirical estimate, but its age profile remains steep. Finally, we show that the BPP estimator of the true insurance coefficient has, in general, a downward bias that grows as borrowing limits become tighter.
ER  -