Nonlinear Household Earnings Dynamics, Self-insurance, and Welfare

Mariacristina De Nardi, Giulio Fella and Gonzalo Paz-Pardo

No 24326, NBER Working Papers from National Bureau of Economic Research, Inc

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 (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.

JEL-codes: E21 H21 J3 (search for similar items in EconPapers)
Date: 2018-02
New Economics Papers: this item is included in nep-dge, nep-ias, nep-lma, nep-mac and nep-pbe
Note: PE
References: Add references at CitEc
Citations: View citations in EconPapers (11)

Published as Mariacristina De Nardi & Giulio Fella & Gonzalo Paz-Pardo, 2020. "Nonlinear Household Earnings Dynamics, Self-Insurance, and Welfare," Journal of the European Economic Association, vol 18(2), pages 890-926.

Downloads: (external link)
http://www.nber.org/papers/w24326.pdf (application/pdf)

Related works:
Journal Article: Nonlinear Household Earnings Dynamics, Self-Insurance, and Welfare (2020)
Working Paper: Nonlinear household earnings dynamics, self-insurance, and welfare (2018)
Working Paper: Nonlinear household earnings dynamics, self-insurance, and welfare (2018)
Working Paper: Nonlinear household earnings dynamics, self-insurance, and welfare (2018)
Working Paper: Nonlinear household earnings dynamics, self-insurance, and welfare (2018)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:24326

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w24326

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().