Nonlinear household earnings dynamics, self-insurance, and welfare

Mariacristina De Nardi, Giulio Fella and Gonzalo Paz-Pardo

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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 (Social Security Administration) and survey (Panel Study of Income Dynamics) data. We study the implications of two processes for household, post-tax earnings in a standard life-cycle model: a canonical earnings process (that includes a persistent and a transitory shock) and a rich earnings dynamics process (that allows 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. Richer earnings dynamics also imply lower welfare costs of earnings risk, but, as the canonical earnings process, do not generate enough concentration at the upper tail of the wealth distribution.

Keywords: earnings risk; savings; consumption; inequality; life cycle (search for similar items in EconPapers)
JEL-codes: D14 D31 E21 J31 (search for similar items in EconPapers)
Date: 2018-06-15
New Economics Papers: this item is included in nep-dge, nep-ias and nep-mac
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Citations: View citations in EconPapers (17)

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http://eprints.lse.ac.uk/90375/ Open access version. (application/pdf)

Related works:
Journal Article: Nonlinear Household Earnings Dynamics, Self-Insurance, and Welfare (2020)
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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