Nonlinear household earnings dynamics, self-insurance, and welfare

Mariacristina De Nardi, Giulio Fella and Gonzalo Paz-Pardo

No 156, 2018 Meeting Papers from Society for Economic Dynamics

Abstract: Earnings dynamics are much richer than typically assumed in macro models with heterogenous 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 household-post-tax earnings processes in a standard life-cycle model: the 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 the 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.

Date: 2018
New Economics Papers: this item is included in nep-dge, nep-ias and nep-pbe
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Citations: View citations in EconPapers (10)

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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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