NATIONAL BUREAU OF ECONOMIC RESEARCH
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Household Risk Management

Adriano A. Rampini, S. Viswanathan

NBER Working Paper No. 22293
Issued in May 2016, Revised in May 2017
NBER Program(s):Corporate Finance, Economic Fluctuations and Growth, Health Economics

Households' insurance against shocks to income and asset values (that is, household risk management) is limited, especially for poor households. We argue that a trade-off between intertemporal financing needs and insurance across states explains this basic insurance pattern. In a model with limited enforcement, we show that household risk management is increasing in household net worth and income, incomplete, and precautionary. These results hold in economies with income risk, durable goods and collateral constraints, and durable goods price risk, under quite general conditions and, remarkably, risk aversion is sufficient and prudence is not required. In equilibrium, collateral scarcity lowers the interest rate, reduces insurance, and increases inequality.

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Document Object Identifier (DOI): 10.3386/w22293

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