Risk sharing by households within and across regions and industries

Cochrane (1991) and Mace (1991) test if risk sharing across households is complete in the sense that household consumption moves one-for-one with aggregate consumption. In their studies the source of income risk is idiosyncratic, and agents can share risk across the entire economy. Using a sample of households from the Panel Study on Income Dynamics (PSID), we explore whether individuals diversify the risk associated within their industries and regions, as well as across industries and regions. We find that there is stronger evidence of within region and industry risk sharing than across region and industry risk sharing. In neither case, however, is the risk sharing complete.