Private Information in the Family

Abstract:

We examine the role of private information within families. Optimal risk sharing under full information implies that relative consumption should be independent of relative income within couples, whereas a positive relationship arises under optimal incentive-constrained insurance with private information. We assemble a new data set based on Dutch panel data that contains evidence on private information within couples. When we split the sample into couples that are fully informed about each other's income and those that are not, a positive relationship between income and consumption shares emerges only among those who are not fully informed about each other's income. This holds true when adding couple fixed effects, so that, indeed, a change in relative income within a given couple affects their consumption sharing. In contrast, measures of the degree of commitment have no impact on risk sharing once private information is controlled for. We interpret these findings using a model of optimal-incentive constrained insurance that (unlike approaches based on the revelation principle) does not require full disclosure of private information as part of the optimal mechanism.