NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

A Test of Consumption Insurance

John H. Cochrane

NBER Working Paper No. 2642 (Also Reprint No. r1700)
Issued in July 1988
NBER Program(s):   EFG

Are individuals effectively insured against idiosyncratic shocks to income or wealth by either formal or informal mechanisms? This paper shows that under perfect insurance, marginal utility should grow at the same rate for all consumers, and that the distribution of measured consumption growth rates should be independent of variables that are exogenous to the individual consumer when we allow for measurement error in consumption and for variation in preferences. This proposition is tested by cross sectional regressions of individual consumption growth on a variety of variables that should not be correlated with it under perfect insurance, including illness, being fired from a job, etc.

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Document Object Identifier (DOI): 10.3386/w2642

Published: "A Simple Test of Consumption Insurance." From Journal of Political Economy, Vol. 99, No. 5, pp. 957-976, (October 1991).

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