Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/210417
Authors: 
De Nardi, Mariacristina
Fella, Giulio
Paz Pardo, Gonzalo
Year of Publication: 
2018
Series/Report no.: 
Working Paper 860
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 profit 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.
Subjects: 
Earnings risk
savings
consumption
inequality
life cycle
JEL: 
D14
D31
E21
J31
Document Type: 
Working Paper

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