A test of consumption insurance

Author / Creator

Cochrane, John H. (John Howland), 1957-

Available as

Online

Summary

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 ...

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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