From income to consumption: measuring households partial insurance

Abstract

This article computes the degree of consumption insurance with respect to transitory and permanent income shocks. The lack of income–consumption data in the US surveys forces researchers to use an empirical strategy to impute consumption. This procedure is avoided by using the Spanish Household Budget Continuous Survey, which contains true panel data on consumption and income information in the same survey. We find full insurance for transitory income shocks and partial insurance for permanent shocks for some sub-groups. For the full sample, a 10% permanent income shock induces a 4.8% permanent change in consumption, with higher insurance capacity for college, home-owner and high-wealth households. We also compute the role of durables and family income transfers as smoothing devices. The comparison of insurance level when based on true consumption data versus imputed consumption data shows that the use of imputed consumption underestimates permanent insurance.

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Correspondence to José María Casado.

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Casado, J.M. From income to consumption: measuring households partial insurance. Empir Econ 40, 471–495 (2011). https://doi.org/10.1007/s00181-010-0337-z

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Keywords

  • Consumption
  • Income
  • Insurance
  • Inequality

JEL Classification

  • D12
  • D91
  • I30