Consumption inequality and partial insurance

This paper uses panel data on household consumption and income to evaluate the degree of insurance to income shocks. Our aim is to describe the transmission of income inequality into consumption inequality by contrasting shifts in the cross-sectional distribution of income growth with shifts in the cross-sectional distribution of consumption growth. We combine panel data on income from the PSID with consumption data from repeated CEX cross-sections. The results point to some partial insurance but reject the complete market restrictions. We find a greater degree of insurance for transitory shocks and differences in the degree of insurance over time and across demographic groups. We also document the importance of durables and of taxes and transfers as a means of insurance