Heterogenous Life-Cycle Profiles, Income Risk and Consumption Inequality

Thijs van Rens and Giorgio Primiceri

No 5881, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Was the increase in income inequality in the US due to permanent shocks or merely to an increase in the variance of transitory shocks? The implications for consumption and welfare depend crucially on the answer to this question. We use CEX repeated cross-section data on consumption and income to decompose idiosyncratic changes in income into predictable life-cycle changes, transitory and permanent shocks and estimate the contribution of each to total inequality. Our model fits the joint evolution of consumption and income inequality well and delivers two main results. First, we find that permanent changes in income explain all of the increase in inequality in the 1980s and 90s. Second, we reconcile this finding with the fact that consumption inequality did not increase much over this period. Our results support the view that many permanent changes in income are predictable for consumers, even if they look unpredictable to the econometrician, consistent with models of heterogeneous income profiles.

Keywords: Consumption; Inequality; Risk; Incomplete markets; Heterogeneity (search for similar items in EconPapers)
JEL-codes: D12 D31 D52 D91 E21 (search for similar items in EconPapers)
Date: 2006-10
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Heterogeneous life-cycle profiles, income risk and consumption inequality (2009)
Working Paper: Heterogeneous Life-Cycle Profiles, Income Risk and Consumption Inequality (2007)
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