Household Welfare, Precautionary Saving, And Social Insurance Under Multiple Sources Of Risk

This paper assesses the quantitative importance of a number of sources of income risk for household welfare and precautionary saving. To that end the author constructs a lifecycle consumption model in which household income is subject to shocks associated with disability, health, unemployment, job changes, wages, work hours, and a residual component of household income. The author uses PSID data to estimate the key processes that drive and affect household income, and then use the consumption model to: (i) quantify the welfare value to consumers of providing full, actuarially fair insurance against each source of risk and (ii) measure the contribution of each type of shock to the accumulation of precautionary savings.