Accounting for Households' Perceived Income Uncertainty in Consumption Risk Sharing

We develop a consumption risk-sharing model that distinguishes households' perceived income uncertainty from income uncertainty as measured by an econometrician. Households receive signals on their future disposable income that can drive a gap between the two uncertainties. Accounting for the difference in uncertainty, the model jointly explains three consumption risk sharing measures in US microdata that are not captured without the difference: (i) the cross-sectional variance of households' consumption, (ii) the covariance of current consumption and income growth and (iii) the income-conditional mean of household consumption. Households' perceived income uncertainty is 12% lower than the uncertainty of an econometrician which is consistent with direct estimates of the predictive power of subjective income expectations.