Business Intelligence

Risk Sharing In Private Information Models With Asset Accumulation: Explaining The Excess Smoothness Of Consumption

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Executive Summary

The authors study testable implications for the dynamics of consumption and income of models in which first best allocations are not achieved because of a moral hazard problem with hidden saving. They show that in this environment agents typically achieve more insurance than that obtained under self insurance with a single asset. Consumption allocations exhibit 'Excess smoothness', as found and defined by Campbell and Deaton (1989). They argue that excess smoothness, in this context, is equivalent to a violation of the intertemporal budget constraint considered in a Bewley economy (with a single asset).

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