EconPapers    
Economics at your fingertips  
 

Higher-Order Income Risk over the Business Cycle

Christopher Busch and Alexander Ludwig ()

No 14538, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We extend the canonical income process with persistent and transitory risk to shock distributions with left-skewness and excess kurtosis, to which we refer as higher- order risk. We estimate our extended income process by GMM for household data from the United States. We find countercyclical variance and procyclical skewness of persistent shocks. All shock distributions are highly leptokurtic. The existing tax and transfer system reduces dispersion and left-skewness of shocks. We then show that in a standard incomplete-markets life-cycle model, first, higher-order risk has sizable welfare implications, which depend crucially on risk attitudes of households; second, higher-order risk matters quantitatively for the welfare costs of cyclical idiosyncratic risk; third, higher-order risk has non-trivial implications for the degree of self-insurance against both transitory and persistent shocks.

Keywords: Business cycle; GMM estimation; labor income risk; Life-Cycle Model; Persistent and Transitory Income Shocks; Risk attitudes; Skewness (search for similar items in EconPapers)
JEL-codes: D31 E24 E32 H31 J31 (search for similar items in EconPapers)
Date: 2020-03
New Economics Papers: this item is included in nep-dge, nep-ias, nep-mac, nep-ore and nep-rmg
References: Add references at CitEc
Citations: View citations in EconPapers (5) Track citations by RSS feed

Downloads: (external link)
http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=14538 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Working Paper: Higher-Order Income Risk over the Business Cycle (2020) Downloads
Working Paper: Higher-Order Income Risk over the Business Cycle (2020) Downloads
Working Paper: Higher-order income risk over the business cycle (2020) Downloads
Working Paper: Higher-order income risk over the business cycle (2020) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:14538

Ordering information: This working paper can be ordered from
http://www.cepr.org/ ... rs/dp.php?dpno=14538

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().

 
Page updated 2021-01-30
Handle: RePEc:cpr:ceprdp:14538