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Consumption and Risk Sharing Over the Life Cycle
Stockholm University, Faculty of Social Sciences, Institute for International Economic Studies.
Graduate School of Industrial Administration, Carnegie Mellon University.
Wharton School, University of Pennsylvania.
2002 (English)Report (Other academic)
Abstract [en]

A striking feature of U.S. data on income and consumption is that inequality increses with age. Using both panel data and an equilibrium life cycle model, we argue that this is informative for understanding the importance and the characteristics of idiosyncratic labor market risk. We find that uncertainty distributed throughout the working years accounts for 40 percent of lifetime uncertainty, with the remainder being realized prior to entering the labor market. We estimate that the shocks received over the life cycle contain a highly persistent component, with an autocorrelation coefficient between 0,98 and unity. The joint behavior of earnings and consumption inequality, interpreted using our model, adds to the body of evidence suggesting that labor market risks are imperfectly pooled and that a precautionary motive is an important aspect of U.S. savings behavior. The restrictions imposed by general equilibrium theory play an important role in arriving at each of these conclusions.

Place, publisher, year, edition, pages
Stockholm: IIES , 2002. , 52 p.
Seminar Paper / Institute for International Economic Studies, Stockholm University. (Online), ISSN 1653-610X
Keyword [en]
Risk sharing, income and consumption inequality, idiosyncratic risk
National Category
URN: urn:nbn:se:su:diva-41184OAI: diva2:328865
Available from: 2010-07-07 Created: 2010-07-06 Last updated: 2016-04-08Bibliographically approved

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