Household Risk Management

Households' insurance against shocks to income, health and other non-discretionary expenditures, and asset values (that is, household risk management) is limited, especially for poor households. We argue that a trade-off between intertemporal financing needs and insurance across states explains...

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Bibliographic Details
Published in:NBER Working Paper Series 2016-05, p.22293
Main Authors: Rampini, Adriano A, Viswanathan, S
Format: Article
Language:English
Subjects:
Collateral
Consumption
Durable goods
Economic models
Economic statistics
Economic theory
Education
Enforcement
Equity
Expenditures
Health economics
Health insurance
Households
Interest rates
Revolving credit
Risk aversion
Risk management
Studies
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Summary:Households' insurance against shocks to income, health and other non-discretionary expenditures, and asset values (that is, household risk management) is limited, especially for poor households. We argue that a trade-off between intertemporal financing needs and insurance across states explains this basic insurance pattern. In a model with limited enforcement, we show that household risk management is increasing in household net worth and income, incomplete, and precautionary. These results hold in economies with income risk, durable goods and collateral constraints, and durable goods price risk, under quite general conditions and, remarkably, risk aversion is sufficient and prudence is not required. In equilibrium, collateral scarcity results in a lower interest rate, reduced insurance, and increased inequality.
ISSN:0898-2937
DOI:10.3386/w22293