Advance Information and Consumption Insurance: Evidence from Panel Data

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Tinbergen Institute Discussion Paper ; No. TI 2022-032/VI

Classification and Topics

• Classification: Wirtschaft ; Single Equation Models; Single Variables: Panel Data Models; Spatio-temporal Models ; Consumer Economics: Empirical Analysis ; Personal Income, Wealth, and Their Distributions ; Incomplete Markets ; Criteria for Decision-Making under Risk and Uncertainty ; Macroeconomics: Consumption; Saving; Wealth
• Subject: income risk ; advance information ; consumption insurance ; panel data ; incomplete markets

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Pedroni, Marcelo ; Singh, Swapnil ; Stoltenberg, Christian
• Event: Veröffentlichung
• (who): Tinbergen Institute
• (where): Amsterdam and Rotterdam
• (when): 2022

Further information

• Handle: http://hdl.handle.net/10419/263952
• Last update: 10.03.2025, 11:46 AM CET