Nonlinear Household Earnings Dynamics, Self-insurance, and Welfare / Mariacristina De Nardi, Giulio Fella, Gonzalo Paz Pardo.

Format:

Book

Author/Creator:

De Nardi, Mariacristina.

Contributor:

National Bureau of Economic Research.

Fella, Giulio.

Pardo, Gonzalo Paz.

Series:

Working Paper Series (National Bureau of Economic Research) no. w24326.

NBER working paper series no. w24326

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2018.

Summary:

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 (Social Security Administration) and survey (Panel Study of Income Dynamics) 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 while 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 also implies lower welfare costs of earnings risk.

Notes:

Print version record

February 2018.