Consumption and risk sharing over the life cycle

By Kjetil Storesletten, Chris I. Telmer, Amir Yaron. 2004

783 citations recorded by the source corpus.

A striking feature of U.S. data on income and consumption is that inequality increases with age. Using both panel data and an equilibrium life cycle model, we argue that this is informative for understanding the importance and the characteristics of idiosyncratic labor market risk. We find that uncertainty distributed throughout the working years accounts for 40 percent of life time uncertainty, with the remainder being realized prior to entering the labor market. We estimate that the shocks received over the life cycle contain a highly persistent component, with an autocorrelation coefficient between 0.98 and unity. The joint behavior of earnings and consumption inequality, interpreted using our model, adds to the body of evidence suggesting that labor market risks are imperfectly pooled and that a precautionary motive is an important aspect of U.S. savings behavior. The restrictions imposed by general equilibrium theory play an important role in arriving at each of these conclusions.

Subfields: Accounting, Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/d5c1ffd3f437df4b4b6abf153f5b831004220d8a

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Citations in the corpus

Consumption, Income and Earnings Inequality in Britain (2010, background): “…attempted to explain the empirical phenomena underlying the observed distributional dynamics of consumption and income inequality: including, Blundell and Preston (1998), Blundell et al. (2008c), Guvenen (2006), Heathcote et al. (2004, 2007), Krueger and Perri (2006) and Storesletten et al. (2004).”
The Life-cycle Effects of House Price Changes (2005, background): “Storesletten, Telmer, and Yaron (2004) report similar estimates for labor income processes.”
Consumption, Income, and Wealth Inequality in Canada (2010, background): “Interestingly, wage inequality increases almost linearly over the life-cycle, suggesting the presence of highly persistent wage shocks (see Storesletten et al. (2004)).”
Capital Taxation: Quantitative Explorations of the Inverse Euler Equation (2012, positive): “These numbers represent the gains, for a given labor allo- 8 The number 0.0161 corresponds to the variance of the innovations in the permanent component of income estimated by Storesletten, Telmer, and Yaron (2004b).”
Taxing Capital? Not a Bad Idea After All! (2009, positive): “In particular, Storesletten et al. (2004) document that i) at cohort age 22 the cross-sectional variance of household labor income is about 0:2735; ii) at age 60 it is about 0:9 and iii) that it increases roughly linearly in between.”
Learning Your Earning: Are Labor Income Shocks Really Very Persistent? (2007, neutral): “†Email: guvenen@eco.utexas.edu; Website: http://www.eco.utexas.edu/faculty/Guvenen”
Accounting for the Rise in Consumer Bankruptcies (2010, neutral): “Source: The rows labeled 1981 and 1991 are from Sullivan, Warren, and Westbrook (2000), Table 2.4. The 78/79 and 1980 values are reported by Domowitz and Eovaldi (1993). The Ohio 1997 data are from a survey of Ohio bankrupts reported in Sullivan, Warren, and Westbrook (2000), Table 2.”
Why Has House Price Dispersion Gone Up (2010, background): “…dispersion at the individual level (e.g. Hornstein, Krusell, and Violante, 2004) and studies its effects on risk-sharing (Krueger and Perri, 2006; Storesletten, Telmer, and Yaron, 2004; Heathcote, Storesletten, and Violante, 2005; Lustig and Van Nieuwerburgh, 2006) and on asset pricing…”
Two Views of Inequality Over the Life Cycle (2005, background): “The age profile of the variance of hours and the variance of consumption are instead invariant to the assumptions made about time/cohort effects.6 These age-profiles have information about the driving income process (see also Storesletten et al., 2004).”
The effectiveness of government debt and transfers as insurance (2001, background): “…e is iid normally distributed with mean zero and variance s2e : Aiyagari and McGrattan set r ¼ 0:60 and se ¼ 0:24: Recent evidence, for example Card (1991), Hubbard et al. (1994), Storesletten et al. (1997), and Flod!en and Lind!e (2001), suggest that wage and income processes are more persistent.”