Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/231502 
Year of Publication: 
2021
Series/Report no.: 
ICIR Working Paper Series No. 36/21
Publisher: 
Goethe University Frankfurt, International Center for Insurance Regulation (ICIR), Frankfurt a. M.
Abstract: 
We extend the canonical income process with persistent and tran- sitory risk to cyclical shock distributions with left-skewness and excess kurtosis. We estimate our income process by GMM for US household data. We find countercyclical variance and procyclical skewness of per- sistent shocks. All shock distributions are highly leptokurtic. The tax and transfer system reduces dispersion and left-skewness. We then show that in a standard incomplete-markets life-cycle model, first, higher- order risk has sizable welfare implications, which depend on risk atti- tudes; second, it matters quantitatively for the welfare costs of cyclical idiosyncratic risk; third, it has non-trivial implications for self-insurance against shocks.
Subjects: 
Idiosyncratic Income Risk
Cyclical Income Risk
Life-Cycle Model
Document Type: 
Working Paper

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