Nonlinear Household Earnings Dynamics, Self-Insurance, and Welfare

Mariacristina De Nardi, Giulio Fella and Gonzalo Paz-Pardo

Journal of the European Economic Association, 2020, vol. 18, issue 2, 890-926

Abstract: Earnings dynamics are much richer than typically assumed in macro models with heterogeneous agents. This holds for individual-pre-tax and household-post-tax earnings and across administrative and survey data. We estimate two alternative processes for household after-tax earnings and study their implications using a standard life-cycle model. Both processes feature a persistent and a transitory component, but although the first one is the canonical linear process with stationary shocks, the second one has substantially richer earnings dynamics, allowing for age-dependence of moments, non-normality, and nonlinearity in previous earnings and age. Allowing for richer earnings dynamics implies a substantially better fit of the evolution of cross-sectional consumption inequality over the life cycle and of the individual-level degree of consumption insurance against persistent earnings shocks. The richer earnings process implies lower welfare costs of earnings risk.

Date: 2020
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Related works:
Working Paper: Nonlinear household earnings dynamics, self-insurance, and welfare (2018)
Working Paper: Nonlinear household earnings dynamics, self-insurance, and welfare (2018)
Working Paper: Nonlinear Household Earnings Dynamics, Self-insurance, and Welfare (2018)
Working Paper: Nonlinear household earnings dynamics, self-insurance, and welfare (2018)
Working Paper: Nonlinear household earnings dynamics, self-insurance, and welfare (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:oup:jeurec:v:18:y:2020:i:2:p:890-926.

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