Household Risksharing Channels

This paper aims to fill the gap on the analysis of risksharing channels at the micro level, both within and across households. Using data from the Bank of Italy’s Survey on Household Income and Wealth covering the financial crisis, we are able to quantify in a unified and consistent framework several risksharing mechanisms that so far have been documented separately. We find that Italian households were able to smooth at least 78% of shocks to household head’s non-financial income (labelled “basic income”) in 2008-2010, a fraction rising to 80% in 2010-2012. The most important smoothing mechanism turns out to be within-household risksharing, which is able to absorb about half of a shock; but an analysis by net wealth discloses striking differences in within-household risksharing between “poor” and “rich” households. Self-insurance through saving/dissaving is also notable, as it cushions 28% of changes in basic income in 2008-2010, and 24% in 2010-2012. Interestingly, risksharing through portfolio diversification and private transfers is rather limited, but the overall degree of shock absorption occurring through private risksharing channels reaches 70%, as opposed to a meager 7% of a shock cushioned by public transfers and taxes.