Ricerc@Sapienza

Heterogeneity in risk attitudes, if not properly accounted for, may induce a bias on the income coefficient of standard consumption insurance regressions. We show that, extending the theoretical analysis and empirical findings in Schulhofer-Wohl (Journal of Political Economy, 2011, 119, 925–958), the sign of the bias is ambiguous, and depends on cycle-related variables and on the covariances of both aggregate and idiosyncratic risk with individual risk aversion.

Correct assessment of consumption risk and its international diversification has important policy implications. However, existing studies of international risk sharing rely on the unrealistic assumptions that all economies are characterized by symmetric preferences and uniform transmission of global shocks. We relax these homogeneity constraints and compare our proposed approach with the conventional ones using a 44-year panel of 120 countries.