Maurizio Mazzocco

Testing Efficient Risk Sharing with Heterogeneous Risk Preferences

Previous tests of efficient risk sharing have assumed that households have identical risk preferences. This assumption is equivalent to the restriction that households can pool their resources, but cannot optimally allocate them according to individual risk preferences. In this paper, we first test the hypothesis of homogeneous risk preferences and reject it. This result implies that previous tests should have rejected efficiency even if households are perfectly sharing risk. We then derive two tests of efficient risk sharing that allow for heterogeneity in risk preferences. Using the two tests we cannot reject efficient risk sharing

Saving, Risk Sharing, and Preferences for Risk

Saving decisions are made jointly by household members who generally earn risky incomes. Consequently, to interpret saving patterns it is crucial to analyze the relationship between intrahousehold risk sharing and intertemporal choices. To that end in this paper the household is characterized as a group of agents with possibly heterogeneous preferences making efficient decisions. Two results are obtained. First, it is shown that risk sharing can increase the amount saved by the household. Second, I find that an increase in risk aversion and prudence of an individual member can reduce household risk aversion and prudence. These results are consistent with the empirical evidence collected using the HRS.

Static and Intertemporal Household Decisions

We discuss the most popular static and dynamic models of household behavior. Our main objective is to explain which aspects of household decisions different models can account for. Using this insight, we describe testable implications, identification results, and estimation findings obtained in the literature. Particular attention is given to the ability of different models to answer various types of policy questions.

Individual Rather Than Household Euler Equations: Identification and Estimation of Individual Preferences Using Household Data

In this paper it is shown that the intratemporal and intertemporal preferences of each decision maker in the household can be identified even if individual consumption is not observed. This identification result is used jointly with the Consumer Expenditure Survey (CEX) to estimate the intratemporal and intertemporal features of individual preferences. This paper is one of the first attempts to provide estimates of the wifes and husbands intertemporal preferences by taking into account that household behavior is the outcome of joint decisions. The empirical findings indicate that there is heterogeneity in intertemporal preferences between wife and husband. The identification and estimation results are important for at least two reasons. First, they suggest that to answer policy questions the household decision process should be characterized using one set of preferences for each decision maker. Second, the estimates of individual preferences provided in this paper can be used to evaluate policies aimed at affecting household intertemporal behavior.

Intertemporal Behavior and Household Structure

In this paper, the traditional household Euler equations are estimated for singles and separately for couples. Using the CEX and the PSID, I reject the Euler equations of couples, but I cannot reject the Euler equations of singles. To rationalize this result, I develop an intertemporal model with two features. First, household members are represented using individual preferences. Second, household members cannot commit to future allocations of resources. It is shown that an excess sensitivity test should generally reject the household Euler equations of couples, but not of singles. A test is then derived to evaluate the explanation given in this paper against alternative hypotheses using a proportionality condition which is specific to the intertemporal model introduced here. I cannot reject the rationalization provided in this paper.