NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Insuring Consumption Using Income-Linked Assets

Andreas Fuster, Paul S. Willen

NBER Working Paper No. 15829
Issued in March 2010
NBER Program(s):   EFG

Shiller (2003) and others have argued for the creation of financial instruments that allow individuals to insure risks associated with their lifetime labor income. In this paper, we argue that while the purpose of such assets is to smooth consumption across states of nature, one must also consider the assets' effects on households' ability to smooth consumption over time. We show that consumers in a realistically calibrated life-cycle model would generally prefer income-linked loans (with a rate positively correlated with income shocks) to an income-hedging instrument (a limited liability asset whose returns correlate negatively with income shocks) even though the assets offer identical opportunities to smooth consumption across states. While for some parameterizations of our model the welfare gains from the presence of income-linked assets can be substantial (above 1% of certainty-equivalent consumption), the assets we consider can only mitigate a relatively small part of the welfare costs of labor income risk over the life cycle.

download in pdf format
   (324 K)

email paper

This paper is available as PDF (324 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w15829

Published: Andreas Fuster & Paul S. Willen, 2011. "Insuring Consumption Using Income-Linked Assets," Review of Finance, European Finance Association, vol. 15(4), pages 835-873. citation courtesy of

Users who downloaded this paper also downloaded these:
Attanasio and Weber w15756 Consumption and Saving: Models of Intertemporal Allocation and Their Implications for Public Policy
Jappelli and Pistaferri w15739 The Consumption Response to Income Changes
Alvarez, Guiso, and Lippi w15835 Durable consumption and asset management with transaction and observation costs
Ellickson, Houghton, and Timmins w15832 Estimating Network Economies in Retail Chains: A Revealed Preference Approach
Gordon w15834 Revisiting U. S. Productivity Growth over the Past Century with a View of the Future
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us