Testing for Full Insurance Using Exogenous Information

We strongly reject the full-insurance hypothesis, using testing variables that are not decision variables for the households under investigation. We find that households are not insured against changes in the unemployment rate associated with the household head's occupational category. Using this exogenous information, we also investigate the appropriateness of exogeneity assumptions on idiosyncratic variables that have been used as testing variables in the full-insurance literature. It is shown that several exogeneity assumptions made in the existing literature are potentially problematic.