Inequality over the business cycle: Estimating income risk using micro-data on consumption

Giorgio Primiceri and Thijs van Rens

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: We use CEX repeated cross-section data on consumption and income, to evaluate the nature of increased income inequality in the 1980s and 90s. We decompose unexpected changes in family income into transitory and permanent, and idiosyncratic and aggregate components, and estimate the contribution of each component to total inequality. The model we use is a linearized incomplete markets model, enriched to incorporate risk-sharing while maintaining tractability. Our estimates suggest that taking risk sharing into account is important for the model fit; that the increase in inequality in the 1980s was mainly permanent; and that inequality is driven almost entirely by idiosyncratic income risk. In addition we find no evidence for cyclical behavior of consumption risk, casting doubt on Constantinides and Duffie’s (1995) explanation for the equity premium puzzle.

Keywords: Consumption; inequality; risk; incomplete markets; business cycle (search for similar items in EconPapers)
JEL-codes: D12 D31 D52 D91 E21 E32 G10 (search for similar items in EconPapers)
Date: 2002-07, Revised 2004-10
New Economics Papers: this item is included in nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Working Paper: Inequality over the Business Cycle: Estimating Income Risk using Micro-Data on Consumption (2002)
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Persistent link: https://EconPapers.repec.org/RePEc:upf:upfgen:943

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