Risk Sharing by Households within and Across Regions and Industries

Cochrane (1991, Journal of Political Economy 99, 957–976) and Mace (1991, Journal of Political Economy 99, 928–956) 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 households share the risk associated with their industries and regions across households in other regions and industries. We find that a large fraction of risk faced by households is not shared across regions and industries