Risk Sharing by
Households
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Abstract Cochrane (1991) and Mace (1991) test if risk sharing across households is complete in the sense that household consumption moves one-for-one with aggregate consumption. In their studies the source of income risk is idiosyncratic, and agents can share risk across the entire economy. Using a sample of households from the Panel Study on Income Dynamics (PSID), we explore whether individuals diversify the risk associated within their industries and regions, as well as across industries and regions. We find that there is stronger evidence of within region and industry risk sharing than across region and industry risk sharing. In neither case, however, is the risk sharing complete. JEL Classification System: E21 Keywords: Risk Sharing, Quantity Anomaly Gregory D. Hess is currently teaching at St. John's College, the University of Cambridge. Kwanho Shin is an assistant professor at the University of Kansas. This paper has benefited from comments by Willem Buiter, Oved Yosha, and seminar participants at Birkbeck College, UC Davis, and the Federal Reserve Bank of Kansas City. Part of this paper was written while Hess was a visiting scholar at the Federal Reserve Bank of Kansas City. The opinions expressed are those of the authors and do not necessarily reflect the views of the Federal Reserve Bank of Kansas City or the Federal Reserve System.Hess e-mail: greg.hess@econ.cam.ac.uk
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