Limited Participation and Consumption-Saving Puzzles: A Simple Explanation and the Role of Insurance
Date of this Version
Journal of Financial Economics
In this paper, we show that the existence of a large, negative wealth shock and insufficient insurance against such a shock could explain both the limited stock market participation puzzle and the low-consumption–high-savings puzzle. We then conduct an empirical analysis on the relation between household portfolio choices and access to private insurance and various types of government safety nets. The empirical results demonstrate that a lack of insurance against large, negative wealth shocks is positively correlated with lower participation rates and higher saving rates. Overall, the evidence suggests an important role of insurance in household investment and savings decisions.
© 2010. This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/.
Gormley, T. A., Liu, H., & Zhou, G. (2010). Limited Participation and Consumption-Saving Puzzles: A Simple Explanation and the Role of Insurance. Journal of Financial Economics, 96 (2), 331-344. http://dx.doi.org/10.1016/j.jfineco.2010.01.001
Date Posted: 27 November 2017
This document has been peer reviewed.