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Earnings and Consumption Dynamics: A Nonlinear Panel Data Framework

Manuel Arellano (), Richard Blundell () and Stéphane Bonhomme
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Stéphane Bonhomme: University of Chicago

No 2016-25, Working Papers from Becker Friedman Institute for Research In Economics

Abstract: We develop a new quantile-based panel data framework to study the nature of income persistence and the transmission of income shocks to consumption. Log-earnings are the sum of a general Markovian persistent component and a transitory innovation. The persistence of past shocks to earnings is allowed to vary according to the size and sign of the current shock. Consumption is modeled as an age-dependent nonlinear function of assets, unobservable tastes and the two earnings components. We establish the nonparametric identification of the nonlinear earnings process and of the consumption policy rule. Exploiting the enhanced consumption and asset data in recent waves of the Panel Study of Income Dynamics, we find that the earnings process features nonlinear persistence and conditional skewness. We confirm these results using population register data from Norway. We then show that the impact of earnings shocks varies substantially across earnings histories, and that this nonlinearity drives heterogeous consumption responses. The framework provides new empirical measures of partial insurance in which the transmission of income shocks to consumption varies systematically with assets, the level of the shock and the history of past shocks.

Keywords: earnings dynamics; Consumption; partial insurance; panel data; quantile regression; latent variables (search for similar items in EconPapers)
JEL-codes: C23 D31 D91 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-lab and nep-ltv
Date: 2016
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http://econresearch.uchicago.edu/sites/econresearc ... es/No.%202016-25.pdf October 2016 version (application/pdf)

Related works:
Working Paper: Earnings and Consumption Dynamics: A Nonlinear Panel Data Framework (2016) Downloads
Working Paper: Earnings and Consumption Dynamics: A Nonlinear Panel Data Framework (2015) Downloads
Working Paper: Earnings and consumption dynamics: a nonlinear panel data framework (2015) Downloads
Working Paper: Earnings and consumption dynamics: a nonlinear panel data framework (2015) Downloads
Working Paper: Earnings and Consumption Dynamics: A Nonlinear Panel Data Framework (2015) Downloads
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