The empirical evidence on stock market participation and portfolio choice de…es the predictions of standard life-cycle theory. In this paper we develop and estimate a model of portfolio choice that can account for the limited stock market participation and substantial portfolio diversi…cation seen in the data. We present three realistic extensions to the basic framework: per period …xed costs, public pension provision, and a small chance of a disastrous event in the stock market. The estimated model is able to explain observed patterns at reasonable wealth levels, while keeping to a fairly simple framework. We demonstrate that it is no longer necessary to assume counterfactual asset holdings, heterogeneity in preferences, or implausible parameter values, in order to match key …nancial statistics.
In this paper we show the extent to which public insurance and self-insurance mitigate the cost of health shocks that limit the ability to work. We use consumption data from the UK to estimate the insurance provided by the government disability programme and account for the e¤ectiveness of alternative self-insurance mechanisms. Individuals with a work-limiting health condition, but in receipt of disability insurance, have 7% lower consumption than those without such a condition. Self-insurance through savings and a working partner each provide some insurance bene…t, improving outcomes from 2% to 4%. Reductions in the generosity of incapacity bene…t after 1995 are associated with increases in the consumption loss associated with disability.
We show the extent to which public insurance and self-insurance mitigate the cost of health shocks that limit the ability to work. We use consumption data from the UK to estimate insurance provided by government disability programmes. Individuals with a work-limiting health condition, in receipt of disability insurance, have 9% lower consumption than those without such a condition. Self-insurance through savings and a work-active partner each improve outcomes by about 3%. Reduced generosity of disability insurance after 1995 is associated with increases in the consumption loss on disability, implying worse insurance, but with fewer false claimants, implying better targeting.
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