How Much Consumption Insurance Beyond Self-Insurance?

2010 ◽  
Vol 2 (4) ◽  
pp. 53-87 ◽  
Author(s):  
Greg Kaplan ◽  
Giovanni L Violante
Keyword(s):  
Life Cycle ◽  
Incomplete Markets ◽  
Consumption Smoothing ◽  
Consumption Insurance ◽  
Empirical Estimates ◽  
Permanent Shocks ◽  
Downward Bias

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 Richard Blundell, Luigi Pistaferri, and Ian Preston (2008) (BPP hereafter) on US data. Households in the data have access to more consumption insurance against permanent earnings shocks than in the model. BPP estimate that 36 percent of permanent shocks are insurable, whereas the model's counterpart of the BPP estimator varies between 7 percent and 22 percent, depending on the tightness of debt limits. We also show that the BPP estimator has a downward bias that grows as borrowing limits become tighter. (JEL D31, D91, E21).

scholarly journals Consumption Insurance against Wage Risk: Family Labor Supply and Optimal Progressive Income Taxation

2021 ◽  
Vol 13 (1) ◽  
pp. 79-113
Author(s):  
Chunzan Wu ◽  
Dirk Krueger
Keyword(s):  
Life Cycle ◽  
Labor Supply ◽  
Income Taxation ◽  
Consumption Insurance ◽  
Empirical Estimates ◽  
Welfare Losses ◽  
Insurance Mechanism ◽  
Wage Risk ◽  
Progressive Income Taxation ◽  
Wage Shocks

We show that a calibrated life cycle two-earner household model with endogenous labor supply can rationalize the extent of consumption insurance against shocks to male and female wages, as estimated empirically by Blundell, Pistaferri, and Saporta-Eksten (2016) in US data. In the model, 35 percent of male and 18 percent of female permanent wage shocks pass through to consumption, compared to the empirical estimates of 32 percent and 19 percent. Most of the consumption insurance against permanent male wage shocks is provided through the presence and labor supply response of the female earner. Abstracting from this private intrahousehold income insurance mechanism strongly biases upward the welfare losses from idiosyncratic wage risk as well as the desired extent of public insurance through progressive income taxation. Relative to the standard one-earner life cycle model, the optimal degree of tax progressivity is significantly lower and the welfare gains from implementing the optimal system are cut roughly in half. (JEL D15, H21, H24, J16, J22, J31)

scholarly journals Intertemporal and intratemporal consumption smoothing at retirement: micro evidence from detailed spending and time use data

2021 ◽  
pp. 1-22
Author(s):  
Jim Been ◽  
Kees Goudswaard
Keyword(s):  
Life Cycle ◽  
The Netherlands ◽  
Time Use ◽  
Causal Effect ◽  
Consumption Smoothing ◽  
Elasticity Of Substitution ◽  
Home Production ◽  
Life Cycle Model ◽  
Cycle Model ◽  
Total Consumption

Abstract Using detailed spending and time use data from the Netherlands, this paper analyzes the causal effect of retirement on spending and time use decisions. Both total consumption and disaggregated consumption categories are considered. We do not find empirical evidence for drops in households' total non-durable spending at retirement. Our estimates suggest increases in spending at retirement on goods that are complementary to leisure, but no decreases in spending on goods that are replaceable by home production. The quantitative implication of our empirical results for the Life-Cycle Model is an intertemporal elasticity of substitution for leisure below unity.

scholarly journals Labor Supply and Taxes: A Survey

2011 ◽  
Vol 49 (4) ◽  
pp. 961-1075 ◽  
Author(s):  
Michael P Keane
Keyword(s):  
Human Capital ◽  
Life Cycle ◽  
Labor Supply ◽  
Work Experience ◽  
Fixed Costs ◽  
Long Run ◽  
Returns To Work ◽  
Two Factors ◽  
Downward Bias ◽  
Life Cycle Models

I survey the male and female labor supply literatures, focusing on implications for effects of wages and taxes. For males, I describe and contrast results from three basic types of model: static models (especially those that account for nonlinear taxes), life-cycle models with savings, and life-cycle models with both savings and human capital. For women, more important distinctions are whether models include fixed costs of work, and whether they treat demographics like fertility and marriage (and human capital) as exogenous or endogenous. The literature is characterized by considerable controversy over the responsiveness of labor supply to changes in wages and taxes. At least for males, it is fair to say that most economists believe labor supply elasticities are small. But a sizable minority of studies that I examine obtain large values. Hence, there is no clear consensus on this point. In fact, a simple average of Hicks elasticities across all the studies I examine is 0.31. Several simulation studies have shown that such a value is large enough to generate large efficiency costs of income taxation. For males, I conclude that two factors drive many of the differences in results across studies. One factor is use of direct versus ratio wage measures, with studies that use the former tending to find larger elasticities. Another factor is the failure of most studies to account for human capital returns to work experience. I argue that this may lead to downward bias in elasticity estimates. In a model that includes human capital, I show how even modest elasticities—as conventionally measured—can be consistent with large efficiency costs of taxation. For women, in contrast, it is fair to say that most studies find large labor supply elasticities, especially on the participation margin. In particular, I find that estimates of “long-run” labor supply elasticities—by which I mean estimates that allow for dynamic effects of wages on fertility, marriage, education and work experience—are generally quite large. (JEL D91, J13, J16, J22, J31, H24)

scholarly journals Bequest and Wealth Accumulation: Are Some Pieces of the Puzzle Missing?

1989 ◽  
Vol 3 (3) ◽  
pp. 141-152 ◽  
Author(s):  
Denis Kessler ◽  
André Masson
Keyword(s):  
Life Cycle ◽  
Precautionary Saving ◽  
Precautionary Savings ◽  
Wealth Accumulation ◽  
Main Motivation ◽  
Empirical Estimates ◽  
Inherited Wealth ◽  
Lively Debate ◽  
Aggregate Wealth ◽  
Length Of Life

The lively debate between Laurence J. Kotlikoff and Franco Modigliani presented in the Spring 1988 issue of this journal concerns an old question: what is the main motivation for saving and therefore for the accumulation of wealth? More specifically, what are the respective contributions to aggregate wealth of 1) saving for retirement (also known as “hump” saving); 2) precautionary savings (and “unintended” bequests) due to uncertainty about the length of life; and 3) planned bequests? If Modigliani's life-cycle hypothesis is to be viewed as a close to approximation of reality, then the bulk of existing wealth should have resulted from some combination of hump and precautionary saving. Our comment on this dispute attempts to advance two issues. First, the controversy involves an enormous gap between empirical estimates of the share of “inherited wealth” in total accumulation, even though the estimates are often based on the same data. We hope to clarify why the estimates vary so widely. Second, the Kotlikoff/Modigliani dispute is presented as an American issue, with little extension abroad. We will present some results from other countries that bear on the controversy.

The Life-Cycle Profile of Time Spent on Job Search

2013 ◽  
Vol 103 (3) ◽  
pp. 111-116 ◽  
Author(s):  
Mark Aguiar ◽  
Erik Hurst ◽  
Loukas Karabarbounis
Keyword(s):  
Life Cycle ◽  
Incomplete Markets ◽  
Time Use ◽  
Job Search ◽  
Search Time ◽  
The United States ◽  
Demographic Groups ◽  
The Us ◽  
Time Use Survey ◽  
Standard Life

Using time use survey data we document a hump-shaped profile of job search time in the United States across the life-cycle. The middle-aged unemployed spend roughly three times as much time in job search as the youngest group of unemployed. The hump-shaped profile of job search time is relatively stable across demographic groups. However, the profile of job search time appears to be declining in non-US countries. We discuss how standard life-cycle models with incomplete markets have difficulty in accounting for the hump-shaped profile found in the US data.

scholarly journals Consumption Smoothing and Frequency of Benefit Payments of Cash Transfer Programs

2017 ◽  
Vol 107 (5) ◽  
pp. 430-435 ◽  
Author(s):  
Emma Aguila ◽  
Arie Kapteyn ◽  
Francisco Perez-Arce
Keyword(s):  
Life Cycle ◽  
Durable Goods ◽  
The Elderly ◽  
Cash Transfer ◽  
Consumption Smoothing ◽  
The Other ◽  
Social Programs ◽  
Transfer Programs ◽  
Doctor Visits ◽  
Food Expenditure

We analyze two noncontributory Mexican pension programs for the elderly. Both paid similar amounts, but one paid monthly while the other paid every two months. The Life Cycle Hypothesis suggests frequency of benefits payments should not affect consumption smoothing, but we find the monthly program was more effective in smoothing food expenditure. It also increased doctor visits and reduced the incidence of hunger spells. Under the bimonthly program, expenditures on food significantly decline between paychecks but ownership of durable goods increased. This suggests the importance of payment frequency in social programs.

Consumption and Health

2006 ◽  
Vol 6 (1) ◽  
pp. 1-30 ◽  
Author(s):  
David Domeij ◽  
Magnus Johannesson
Keyword(s):  
Life Cycle ◽  
Health Status ◽  
Incomplete Markets ◽  
Mortality Risk ◽  
Consumer Expenditure ◽  
Consumer Expenditure Survey ◽  
Data Life Cycle ◽  
Data Consumption ◽  
Expenditure Increase ◽  
Swedish Data

Many studies show that individuals do not perfectly smooth consumption at older ages. We argue that an important explanation is that health status declines with age, making consumption at older ages less desirable. We incorporate health status into a standard incomplete markets life-cycle model, by allowing the marginal utility of consumption to increase with health status. Life-cycle income, mortality risk and health status are exogenous in the model and calibrated on Swedish data. Life-cycle consumption is endogenous and matches well Swedish Consumer Expenditure Survey data; consumption expenditure increase with age until about 60 years, and then falls with about 25% to 80 years. An alternative model with mortality risk, but without health status, fails in capturing the fall in consumption with age seen in the data.

scholarly journals Macroeconomic Policies to Increase Social Mobility and Growth in Bolivia

2005 ◽  
pp. 65-102
Author(s):  
Alejandro F. Mercado ◽  
Lykke E. Andersen ◽  
Alice J. Brooks
Keyword(s):  
Human Capital ◽  
Life Cycle ◽  
Social Mobility ◽  
Productivity Growth ◽  
Direct Investment ◽  
Physical Capital ◽  
Consumption Smoothing ◽  
Social Mechanisms ◽  
Macroeconomic Policies ◽  
Development Policies

Poverty in Bolivia continues to be among the highest in Latin America despite decades of concerted national and international efforts to reduce it. The external aid has been generous and foreign direct investment has boomed; nevertheless, average productivity and incomes remain at the same low level as they were 50 years ago.  This paper suggests that the failure of previous development policies is due to a lack of social mobility in the country. Without social mobility, there is little incentive for people to invest in human ad physical capital, and without investment there cannot be productivity growth. In addition, the lack of social mobility implies an inefficient use of human capital, and it hinders the construction of efficient social mechanisms for redistribution and consumption smoothing over the life-cycle. 

scholarly journals Asymmetric Consumption Smoothing

2021 ◽  
Vol 111 (1) ◽  
pp. 192-230
Author(s):  
Brian Baugh ◽  
Itzhak Ben-David ◽  
Hoonsuk Park ◽  
Jonathan A. Parker
Keyword(s):  
Life Cycle ◽  
Credit Card ◽  
Liquidity Constraints ◽  
Mental Accounting ◽  
Consumption Smoothing ◽  
Credit Card Debt ◽  
Life Cycle Model ◽  
Cycle Model ◽  
Level Data ◽  
Tax Refunds

Analyzing account-level data from an account aggregator, we find that households increase consumption when they receive expected tax refunds, as if they face liquidity constraints. However, these same households smooth consumption when making payments in other years, primarily by transferring funds among liquid accounts. Even households carrying credit card debt smooth consumption when making payments, and even highly liquid households spend out of refunds. This behavior is inconsistent with pure liquidity constraints or hand-to-mouth behavior and is most consistent with a mental accounting life-cycle model. (JEL D12, E21, G51, H24, H31)

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