Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/263952 
Year of Publication: 
2022
Series/Report no.: 
Tinbergen Institute Discussion Paper No. TI 2022-032/VI
Publisher: 
Tinbergen Institute, Amsterdam and Rotterdam
Abstract: 
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.
Subjects: 
income risk
advance information
consumption insurance
panel data
incomplete markets
JEL: 
C23
D12
D31
D52
D81
E21
G52
Document Type: 
Working Paper

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