From Income to Consumption: Measuring Households Partial Insurance

This paper computes the degree of consumption insurance with respect to transitory and permanent income shocks for different households. The lack of income-consumption data in the US surveys forces researchers to use an empirical strategy to impute consumption. We avoid this procedure by using the Spanish Continuous Family Expenditure Survey that contains good quality income and consumption 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 percent permanent income shock induces a 7.8 percent permanent change in consumption, with higher insurance capacity for home-owners and more educated households.