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Welfare Costs of Idiosyncratic and Aggregate Consumption Shocks

George M. Constantinides

Review of Asset Pricing Studies2025https://doi.org/10.1093/rapstu/raaf002article
AJG 3ABDC A*
Weight
0.50

Abstract

I estimate the welfare benefits of eliminating idiosyncratic consumption shocks in the United States related (unrelated) to the business cycle as 36%–39% (lower than 1%) of household utility. Estimates of the former exceed earlier ones because I distinguish between idiosyncratic shocks related/unrelated to the business cycle, estimate the negative skewness of shocks, target moments of idiosyncratic shocks from household-level CEX data, and target market moments. Benefits of eliminating aggregate shocks are lower than 1% of utility. Policy should facilitate the insurance of idiosyncratic shocks related to the business cycle, such as job layoffs, with proof that individuals diligently seek suitable employment during periods of unemployment. (JEL D31, D52, E32, E44, G01, G12)

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https://doi.org/https://doi.org/10.1093/rapstu/raaf002

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@article{george2025,
  title        = {{Welfare Costs of Idiosyncratic and Aggregate Consumption Shocks}},
  author       = {George M. Constantinides},
  journal      = {Review of Asset Pricing Studies},
  year         = {2025},
  doi          = {https://doi.org/https://doi.org/10.1093/rapstu/raaf002},
}

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Welfare Costs of Idiosyncratic and Aggregate Consumption Shocks

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Evidence weight

0.50

Balanced mode · F 0.40 / M 0.15 / V 0.05 / R 0.40

F · citation impact0.50 × 0.4 = 0.20
M · momentum0.50 × 0.15 = 0.07
V · venue signal0.50 × 0.05 = 0.03
R · text relevance †0.50 × 0.4 = 0.20

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