Measuring the Transmission of Economic Shocks Among the Household Members of the Same Extended Family

Abstract

To what extent members of the same extended family insure each other's consumption against the occurrence of an unexpected income drop? While existing tests have clearly rejected full risk sharing within the USA extended family, less is known about the degree of consumption insurance. I propose an alternative test of partial insurance that examines if the earnings shocks of a household member of an extended family affect the consumption of other members of the same extended family. Building on the empirical papers that examine the consumption consequences of involuntary displacement, I examine if the food consumption in the household of a parent is affected by the job loss of a member of a separate household where his or her adult child lives. The findings suggest that there is partial insurance in the USA: when a young adult loses his or her job, the consumption of his/her parents' household falls by 2.7 percentage points. (PsycINFO Database Record (c) 2012 APA, all rights reserved)(chapter)