De Nardi, M;
Fella, G;
Paz-Pardo, G;
(2020)
Nonlinear Household Earnings Dynamics, Self-Insurance, and Welfare.
Journal of the European Economic Association
, 18
(2)
pp. 890-926.
10.1093/jeea/jvz010.
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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 and survey data. We estimate two alternative processes for household after-tax earnings and study their implications using a standard life-cycle model. Both processes feature a persistent and a transitory component, but although the first one is the canonical linear process with stationary shocks, the second one has substantially richer earnings dynamics, allowing for age-dependence of moments, non-normality, and nonlinearity in previous earnings and age. Allowing for richer earnings dynamics implies a substantially better fit 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. The richer earnings process implies lower welfare costs of earnings risk.
Type: | Article |
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Title: | Nonlinear Household Earnings Dynamics, Self-Insurance, and Welfare |
Open access status: | An open access version is available from UCL Discovery |
DOI: | 10.1093/jeea/jvz010 |
Publisher version: | https://doi.org/10.1093/jeea/jvz010 |
Language: | English |
Additional information: | This version is the author accepted manuscript. For information on re-use, please refer to the publisher’s terms and conditions. |
UCL classification: | UCL UCL > Provost and Vice Provost Offices > UCL SLASH UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS > Dept of Economics |
URI: | https://discovery.ucl.ac.uk/id/eprint/10068174 |
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