Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/217270
Authors: 
Busch, Christopher
Ludwig, Alexander
Year of Publication: 
2020
Series/Report no.: 
ZEW Discussion Papers No. 20-022
Abstract: 
We extend the canonical income process with persistent and transitory risk to shock distributions with left-skewness and excess kurtosis, to which we refer as higher-order risk. We estimate our extended income process by GMM for household data from the United States. We find countercyclical variance and procyclical skewness of persistent shocks. All shock distributions are highly leptokurtic. The existing tax and transfer system reduces dispersion and left-skewness of shocks. We then show that in a standard incomplete-markets life-cycle model, first, higher-order risk has sizable welfare implications, which depend crucially on risk attitudes of households; second, higher-order risk matters quantitatively for the welfare costs of cyclical idiosyncratic risk; third, higher-order risk has non-trivial implications for the degree of self-insurance against both transitory and persistent shocks.
Subjects: 
Labor Income Risk
Business Cycle
GMM Estimation
Skewness
Persistent and Transitory Income Shocks
Risk Attitudes
Life-Cycle Model
JEL: 
D31
E24
E32
H31
J31
Document Type: 
Working Paper

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