The Review of Asset Pricing Studies Vol. 15 No. 2 2025
Welfare Costs of Idiosyncratic and Aggregate Consumption Shocks
Abstract
I estimate the welfare benefits of eliminating idiosyncratic consumption shocks in the United States related (unrelated) to the business cycle as 36%–39% (lower than 1%) of household utility. Estimates of the former exceed earlier ones because I distinguish between idiosyncratic shocks related/unrelated to the business cycle, estimate the negative skewness of shocks, target moments of idiosyncratic shocks from household-level CEX data, and target market moments. Benefits of eliminating aggregate shocks are lower than 1% of utility. Policy should facilitate the insurance of idiosyncratic shocks related to the business cycle, such as job layoffs, with proof that individuals diligently seek suitable employment during periods of unemployment.
- DOI
- 10.1093/rapstu/raaf002
- Volume
- 15
- Issue
- 2
- Pages
- 103-120
- Language
- en
- Sources
- crossref bibtex:phds-export.bib openalex