Insuring Labour Income Shocks – The Role of The Dynasty
27 Feb 2024
09:30 -10:45
Times are shown in local time.
Open to: All
Seminar Room 2 (Cambridge Judge Business School)
Trumpington Street
Cambridge
CB2 1AG
United Kingdom
Join our Finance seminar
Speaker: Professor Luigi Guiso, Einaudi Institute
About the seminar topic
We provide empirical evidence on the importance of a relatively understudied channel of insurance against labour income shocks: transfers from (cash-rich) parents to (cash-short) children when the latter experience negative labour income shocks. Matching population data for Norway across 2 generations, we establish several results.
First, parents make a transfer—i.e., decumulate liquid assets—when adult children experience negative labour income shocks. Consistent with dynastic insurance, we observe no transfer when income shocks are positive. Second, parents’ responses depend on the nature of the shock. If the income drop is temporary, parents dissave; if the shock is persistent, parents save in order to make future transfers. Parental transfers are substantial, covering 45% of temporary income losses and 28% of persistent ones. Third, there is less parental insurance provision if children can smooth income losses through alternative mechanisms, such as spousal labour supply. Fourth, parents offer more insurance in response to shocks hitting their own child than their child’s spouse; i.e.,“blood matters”.
Moreover, there is more insurance provision if the offspring’s household can count on the transfers from another set of parents (the spouse’s), suggestive of “competition for attention”. Finally, insurance provision is unilateral: there is no evidence that children insure their parents against income shocks.
Speaker bio
Luigi Guiso is the Axa Professor of Household Finance at the Einaudi Institute for Economics and Finance in Rome. He has held positions at the University of Rome Tor Vergata and at the European University Institute in Florence. He has directed the Finance Programme at the Center for Economic Policy Research in London and taught as a visiting professor at the at the University of Chicago Booth School of Business, Northwestern University and Imperial College. He is a fellow of the Econometric Society and honorary foreign member of the American Economic Association.
Besides his work in the field of household finance, he has contributed research in the field of labour economics, firm investments and financial decisions, entrepreneurship and banking, political economy and institutions, and in the field of culture and economics. His research has been published in major scholarly journals such as the Review of Economic Studies, the Quarterly Journal of Economics, the Journal of Political Economy, the American Economic Review and Econometrica.
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