Quantifying Inefficiency in Incomplete Asset Markets

Fixing a risky intertemporal, interagent consumption profile, its quot;social costquot; is the total willingness to pay for smoothing everyone's consumption. It decomposes into a quot;micro costquot; capturing the inefficiency in the distribution of total consumption, risky as it is, and a quot;macro costquot; capturing the marginal benefit of eliminating the risk in total consumption, once efficiently redistributed. We consider the risk that between youth and middle age a person experiences income mobility and the consequent income inequality, and how savings mitigate this risk. US panel data estimates a consumption profile, for which we compute the costs. Social cost is 10-14% of total youth consumption for CRRA parameters 1.25-3.5. Of this, 98-99% is the micro cost and only 1-2% the macro cost. The micro cost is approximately computed for a general consumption profile. The best approximations eschew marginal rates of substitution; turn out simple, increasing functions of the allocation's failure to solve the classical social program involving a weighted welfare function; are accurate in the calibrated economy