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The Effect of Income Risk, Asset Risk and Policy Risk on Household Behaviour

Etheridge, B; (2012) The Effect of Income Risk, Asset Risk and Policy Risk on Household Behaviour. Doctoral thesis , UCL (University College London). Green open access

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Abstract

This thesis quantitatively examines the types of risk that households face, how they prepare for these risks, and the effect of these risks on inequality. The first substantive chapter reviews the evolution of inequality over 1978 to 2005 in the UK along several dimensions and serves as an introduction to subsequent chapters. Following the inequality surge in the 1980s, inequality generally rose more slowly in the 1990s on most measures. The second chapter seeks to explain a puzzling episode in the evolution of inequality in the late 1990s: consumption inequality rose while income inequality fell. I explain this episode by accounting for two features of the UK economy over the period: a house price boom and a sequence of redistributive reforms by the new Labour government. I conclude that asset price movements and government policies can have a noticeable effect on `permanent' (consumption) inequality and that the redistributive effect of the reforms was largely undone by the coincident house price boom. The third chapter uses panel data over 1991 to 2006 to estimate the transmission of income shocks through to consumption. Only around 50% of `permanent' income shocks are transmitted. This estimate reconciles two views of risk over the period: long-lasting income fluctuations, measured by panel data on incomes alone, were high, while consumption risk, measured by the growth in consumption inequality, was much lower. The results further indicate that such income `shocks' are either not fully permanent or are often foreseen by younger households. The fourth chapter theoretically examines the precautionary savings motive for consecutive income risks. In most cases (and particularly when facing permanent shocks) households can combine saving for near-term risks with saving for long-term risks. I term this saving `complementary'. However, in some interesting cases, the interaction of future risks ampli es the precautionary motive.

Type: Thesis (Doctoral)
Title: The Effect of Income Risk, Asset Risk and Policy Risk on Household Behaviour
Open access status: An open access version is available from UCL Discovery
Language: English
UCL classification: UCL > Provost and Vice Provost Offices
UCL > Provost and Vice Provost Offices > UCL SLASH
UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS > Dept of Economics
URI: https://discovery.ucl.ac.uk/id/eprint/1354484
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