Date of Award
Summer 8-2021
Degree Type
Dissertation-Restricted
Degree Name
Ph.D.
Degree Program
Financial Economics
Department
Economics and Finance
Major Professor
Neal Maroney
Second Advisor
Arja Turunen-Red
Third Advisor
Luca Pezzo
Fourth Advisor
Duygu Zirek
Abstract
The dissertation consists of three chapters measuring the degree of risk-sharing in a panel of US households, and its impact on welfare and portfolio choice. Conventional wisdom suggests financial innovation improves risk-sharing by completing markets and lowering transaction costs--households engage in risk-sharing to insure against idiosyncratic income shocks to improve their own welfare. In the first chapter, using household level income and imputed consumption data, I find that households' ability to smooth permanent shocks has slightly increased while transitory insurance remained unchanged. However, I find that participating households have higher consumption insurance. Their ability to insure permanent shocks has improved while their ability to insure transitory shocks has decreased. I also document a change in the composition of risk where the variance of transitory shocks is increasing while the variance of permanent shocks is decreasing. I find significant heterogeneity among households. These results are robust to different income and consumption measurements. In the second chapter, I investigate the welfare and life satisfaction consequences of incomplete markets in a subset of US households. I use a set of parameters describing households' economic environments in terms of income growth, income risk, and transmission risk. I find that changes in risk-sharing have significant implications for household welfare. Cross-sectional differences in risk-sharing environment result in significantly different welfare criteria. I then use IV-regressions to separate the impact of permanent and transitory income and consumption shocks on life satisfaction. As suggested by consumption insurance theory, I find that transitory shocks have no effect on life satisfaction while permanent shocks do. This result suggest that risk-sharing environments have important consequences for households' well-being as well as a significant degree of insurance despite incomplete markets. In the third chapter, I consider the implications in consumption insurance for portfolio choice. Having documented a significant degree of risk sharing, I find that households experiencing positive labor income shocks invest more in risky assets. However permanent shocks are used to increase housing investment, evidenced by the increased allocation towards secured debts. Furthermore, transitory shocks are used to decrease households liabilities, evidenced by the decreased latent unsecured debt allocation.
Recommended Citation
Duvernois, Nicolas, "Incomplete Markets and Financial Innovation: Consequences for Risk-Sharing, Household Welfare, and Portfolio Choice" (2021). University of New Orleans Theses and Dissertations. 2913.
https://scholarworks.uno.edu/td/2913
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