Consumption and Risk Sharing Over the Life Cycle

Kjetil Storesletten (), Chris I. Telmer and Amir Yaron ()

No 7995, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: A striking feature of U.S. data on income and consumption is that inequality increases with age. Using both panel data and an equilibrium life cycle model, we argue that this is informative for understanding the importance and the characteristics of idiosyncratic labor market risk. We find that uncertainty distributed throughout the working years accounts for 40 percent of life time uncertainty, with the remainder being realized prior to entering the labor market. We estimate that the shocks received over the life cycle contain a highly persistent component, with an autocorrelation coefficient between 0.98 and unity. The joint behavior of earnings and consumption inequality, interpreted using our model, adds to the body of evidence suggesting that labor market risks are imperfectly pooled and that a precautionary motive is an important aspect of U.S. savings behavior. The restrictions imposed by general equilibrium theory play an important role in arriving at each of these conclusions.

JEL-codes: E21 D31 (search for similar items in EconPapers)
Date: 2000-11
Note: AP EFG
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Related works:
Working Paper: Consumption and risk sharing over the life cycle (1997)
Working Paper: Consumption and Risk Sharing Over the Life Cycle (2002)
Journal Article: Consumption and risk sharing over the life cycle (2004)
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