Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2022-04-15
Number: 22-032/VI
Author-Name: Marcelo Pedroni
Author-Workplace-Name: University of Amsterdam
Author-Name: Swapnil Singh
Author-Workplace-Name: Bank of Lithuania
Author-Name: Christian Stoltenberg
Author-Workplace-Name: University of Amsterdam
Title: Advance Information and Consumption Insurance: Evidence from Panel Data
Abstract: We investigate whether US households possess advance information about their future income and what this means for consumption insurance.
Based on insights from a theoretical model, we propose a new test to detect advance information, which requires only panel data on consumption and income.
Using the Panel Study of Income Dynamics, we find---in contrast to the existing literature---strong support for the existence of advance information. We use this evidence to estimate a standard incomplete markets model and find that advance information reduces households' income forecast errors by 15%. Our estimation results imply that 27% of all unexpected income changes are passed through to consumption. Ignoring advance information leads to a significant overestimation of consumption insurance and even more so at the bottom of the wealth distribution.
Classification-JEL: C23, D12, D31, D52, D81, E21, G52
Keywords: income risk, advance information, consumption insurance, panel data, incomplete markets
File-URL: https://papers.tinbergen.nl/22032.pdf
File-Format: application/pdf
File-Size: 502,147 bytes
Handle: RePEc:tin:wpaper:20220032