Household Risk Management

66 Pages Posted: 1 Jun 2016 Last revised: 1 Jun 2023

See all articles by Adriano A. Rampini

Adriano A. Rampini

Duke University; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

S. Viswanathan

Duke University - Fuqua School of Business; Duke University - Department of Economics

Multiple version iconThere are 3 versions of this paper

Date Written: May 2016

Abstract

Households' insurance against shocks to income and asset values (that is, household risk management) is limited, especially for poor households. We argue that a trade-off between intertemporal financing needs and insurance across states explains this basic insurance pattern. In a model with limited enforcement, we show that household risk management is increasing in household net worth and income, incomplete, and precautionary. These results hold in economies with income risk, durable goods and collateral constraints, and durable goods price risk, under quite general conditions and, remarkably, risk aversion is sufficient and prudence is not required. In equilibrium, collateral scarcity lowers the interest rate, reduces insurance, and increases inequality.

Suggested Citation

Rampini, Adriano A. and Viswanathan, S., Household Risk Management (May 2016). NBER Working Paper No. w22293, Available at SSRN: https://ssrn.com/abstract=2786471

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National Bureau of Economic Research (NBER) ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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S. Viswanathan

Duke University - Fuqua School of Business ( email )

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United States
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919-684-2818 (Fax)

Duke University - Department of Economics

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