Consumption inequality and partial insurance

Blundell, Richard; Pistaferri, Luigi; Preston, Ian

doi:10.1920/wp.ifs.2004.0428

Cited by 536 publications

(1,087 citation statements)

References 75 publications

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“…We now cast the learning process as a Kalman …ltering problem which allows us to obtain recursive updating formulas for beliefs. Individuals (know i ), observe y i t ; and must learn about S i t i ; z i t : 6 It is convenient to express the learning process as a Kalman …ltering problem using the state-space representation. In this framework, the "state equation" describes the evolution of the vector of state variables that is unobserved by the decision maker:…”

Section: Why Look At Consumption-savings Choice?mentioning

confidence: 99%

Inferring Labor Income Risk from Economic Choices: An Indirect Inference Approach

Guvenen

Smith²

2010

SSRN Journal

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This paper sheds light on the nature of labor income risk by exploiting the information contained in the joint dynamics of households'labor earnings and consumption-choice decisions. In particular, this paper attempts to discriminate between two leading views on the nature of labor income risk: the "restricted income pro…les" (RIP) model-in which individuals are subjected to large and persistent income shocks but face similar life-cycle income pro…les-and the "heterogeneous income pro…les"(HIP) model-in which individuals are subjected to income shocks with modest persistence but face individual-speci…c income pro…les. Although these two di¤erent income processes have vastly di¤erent implications for economic behavior, earlier studies have found that labor income data alone is insu¢ cient to distinguish between them. This paper, therefore, brings to bear the information embedded in consumption data. Speci…cally, we apply the powerful new tools of indirect inference to rich panel data on consumption and labor earnings to estimate a rich structural consumption-savings model. The method we develop is very ‡exible and allows the estimation of income processes from economic decisions in the presence of nonseparabilities between consumption and leisure, partial insurance of income shocks, frequently binding borrowing constraints, missing observations, among others. In this estimation, we use an auxiliary model-which forms the bridge between the data and the consumption-savings model-that provides a sharp distinction between the RIP and HIP models. Finally, we conduct formal statistical tests to assess the extent to which the RIP and HIP models …nd support in the data.For helpful comments and discussions, we thank

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Section: Why Look At Consumption-savings Choice?mentioning

confidence: 99%

Inferring Labor Income Risk from Economic Choices: An Indirect Inference Approach

Guvenen

Smith²

2010

SSRN Journal

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“…Several papers have looked at the variance of permanent shocks in the US in the 1980s (Moffitt and Gottschalk 1994, Meghir and Pistaferri 2004, Blundell, Pistaferri and Preston 2004. All conclude that permanent variances rose in the early 1980s.…”

Section: Introductionmentioning

confidence: 99%

Income risk and consumption inequality: a simulation study

Blundell¹,

Low²,

Preston³

2004

Working Paper Series

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may January 2005Abstract This paper assesses the accuracy of decomposing income risk into permanent and transitory components using income and consumption data. We develop a specific approximation to the optimal consumption growth rule and use Monte Carlo evidence to show that this approximation can provide a robust method for decomposing income risk. The availability of asset data enables the use of a more accurate approximation allowing for partial self-insurance against permanent shocks. We show that the use of data on median asset holdings corrects much of the error in the simple approximation which assumes no self-insurance against permanent shocks.JEL: C30, D52, D91.

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“…15 If we normalize asset holding to zero, we indeed have T = c T y T ; T 1 = c T 1 y T 1 ; and so on. The above argument hence implies that for all t the quantity…”

Section: The Ack Economy As a Foundation Of The Bewley Modelmentioning

confidence: 99%

Risk Sharing in Private Information Models With Asset Accumulation: Explaining the Excess Smoothness of Consumption

Attanasio

Pavoni

2011

Econometrica

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We derive testable implications of model in which first best allocations are not achieved because of a moral hazard problem with hidden saving. We show that in this environment agents typically achieve more insurance than that obtained under autarchy via saving, and that consumption allocation gives rise to 'excess smoothness of consumption', as found and defined by Campbell and Deaton (1987). We argue that the evidence on excess smoothness is consistent with a violation of the simple intertemporal budget constraint considered in a Bewley economy (with a single asset) and use techniques proposed by Hansen et al. (1991) to test the intertemporal budget constraint. We also construct closed form examples where the excess smoothness parameter has a structural interpretation in terms of the severity of the moral hazard problem. Evidence from the UK on the dynamic properties of consumption and income in micro data is consistent with the implications of the model.

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Consumption inequality and partial insurance

Cited by 536 publications

References 75 publications

Inferring Labor Income Risk from Economic Choices: An Indirect Inference Approach

Inferring Labor Income Risk from Economic Choices: An Indirect Inference Approach

Income risk and consumption inequality: a simulation study

Risk Sharing in Private Information Models With Asset Accumulation: Explaining the Excess Smoothness of Consumption

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