Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
986733 | Review of Economic Dynamics | 2006 | 27 Pages |
Abstract
This paper quantifies the macroeconomic implications of the lack of insurance against idiosyncratic labor market risk. I show that in a model economy calibrated to observed individual level data, households make ample use of work effort as a consumption smoothing mechanism. As a consequence, aggregate consumption is 0.6% lower, work effort is 18% higher and labor productivity is 12% lower than they would be in a complete markets setting. Not surprisingly, the welfare benefits of moving towards complete markets are very large. Accounting for the whole transition to the new complete markets steady state I find the welfare costs of market incompleteness above 16% of individual lifetime consumption.
Related Topics
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Authors
Josep Pijoan-Mas,