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Earnings, Consumption and Life Cycle Choices

Costas Meghir () and Luigi Pistaferri ()

Chapter 09 in Handbook of Labor Economics, 2011, vol. 4B, pp 773-854 from Elsevier

Abstract: We discuss recent developments in the literature that studies how the dynamics of earnings and wages affect consumption choices over the life cycle. We start by analyzing the theoretical impact of income changes on consumption--highlighting the role of persistence, information, size and insurability of changes in economic resources. We next examine the empirical contributions, distinguishing between papers that use only income data and those that use both income and consumption data. The latter do this for two purposes. First, one can make explicit assumptions about the structure of credit and insurance markets and identify the income process or the information set of the individuals. Second, one can assume that the income process or the amount of information that consumers have are known and test the implications of the theory. In general there is an identification issue that has only recently being addressed with better data or better "experiments". We conclude with a discussion of the literature that endogenizes people's earnings and therefore change the nature of risk faced by households.

Keywords: Consumption; Risk; Income dynamics; Life cycle (search for similar items in EconPapers)
JEL-codes: J0 (search for similar items in EconPapers)
Date: 2011
ISBN: 978-0-444-53452-1
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Citations: View citations in EconPapers (111) Track citations by RSS feed

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Related works:
Working Paper: Earnings, consumption and lifecycle choices (2010) Downloads
Working Paper: Earnings, Consumption and Lifecycle Choices (2010) Downloads
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