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Interpreting Life Cycle Inequality Patterns as an Efficient Allocation: Mission Impossible?

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  • Alejandro Badel

    (Federal Reserve Bank of St. Louis)

  • Mark Huggett

    (Georgetown University)

Abstract

The life-cycle patterns of consumption, wage and hours inequality observed in U.S. cross-section data are commonly viewed as incompatible with a Pareto efficient allocation. We determine the extent to which these qualitative and quantitative patterns can or cannot be produced by Pareto efficient allocations in models with preference shocks, wage shocks and full information. (Copyright: Elsevier)

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Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

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Handle: RePEc:red:issued:12-119

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Keywords: Life cycle; Inequality; Efficient Allocation; Preference shocks;

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References

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  1. Kjetil Storesletten & Chris Telmer & Amir Yaron, 1997. "Consumption and risk sharing over the life cycle," GSIA Working Papers 228, Carnegie Mellon University, Tepper School of Business.
  2. Attanasio, Orazio & Davis, Steven J, 1996. "Relative Wage Movements and the Distribution of Consumption," Journal of Political Economy, University of Chicago Press, vol. 104(6), pages 1227-62, December.
  3. Deaton, A. & Paxson, C., 1993. "Intertemporal Choice and Inequality," Papers 168, Princeton, Woodrow Wilson School - Development Studies.
  4. Fatih Guvenen, 2007. "An empirical investigation of labor income processes," IFS Working Papers W07/13, Institute for Fiscal Studies.
  5. Heathcote, Jonathan & Storesletten, Kjetil & Violante, Giovanni L, 2004. "The Cross-Sectional Implications of Rising Wage Inequality in the United States," CEPR Discussion Papers 4296, C.E.P.R. Discussion Papers.
  6. Mark Huggett & Gustavo Ventura & Amir Yaron, 2007. "Sources of Lifetime Inequality," Working Papers gueconwpa~07-07-04, Georgetown University, Department of Economics.
  7. Yoram Ben-Porath, 1967. "The Production of Human Capital and the Life Cycle of Earnings," Journal of Political Economy, University of Chicago Press, vol. 75, pages 352.
  8. Browning, Martin & Hansen, Lars Peter & Heckman, James J., 1999. "Micro data and general equilibrium models," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 8, pages 543-633 Elsevier.
  9. Heathcote, Jonathan & Storesletten, Kjetil & Violante, Giovanni L., 2008. "Insurance and opportunities: A welfare analysis of labor market risk," Journal of Monetary Economics, Elsevier, vol. 55(3), pages 501-525, April.
  10. Kjetil Storesletten & Chris I. Telmer & Amir Yaron, 2001. "How Important Are Idiosyncratic Shocks? Evidence from Labor Supply," American Economic Review, American Economic Association, vol. 91(2), pages 413-417, May.
  11. Fatih Guvenen & Anthony Smith, 2013. "Inferring labor income risk and partial insurance from economic choices," Staff Report 485, Federal Reserve Bank of Minneapolis.
  12. Mark Huggett & Juan Carols Parra, 2006. "How Well Does the US Social Insurance System Provide Social Insurance?," Working Papers gueconwpa~06-06-11, Georgetown University, Department of Economics.
  13. Bound, John, et al, 1994. "Evidence on the Validity of Cross-Sectional and Longitudinal Labor Market Data," Journal of Labor Economics, University of Chicago Press, vol. 12(3), pages 345-68, July.
  14. Jonathan Heathcote & Fabrizio Perri & Giovanni L. Violante, 2010. "Unequal We Stand: An Empirical Analysis of Economic Inequality in the United States: 1967-2006," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(1), pages 15-51, January.
  15. Dirk Krueger & Fabrizio Perri, 2006. "Does Income Inequality Lead to Consumption Inequality? Evidence and Theory -super-1," Review of Economic Studies, Oxford University Press, vol. 73(1), pages 163-193.
  16. Mark Hugget & Gustavo Ventura & Amir Yaron, 2002. "Human Capital and Earnings Distribution Dynamics," NBER Working Papers 9366, National Bureau of Economic Research, Inc.
  17. Fatih Guvenen, 2005. "Learning Your Earning: Are Labor Income Shocks Really Very Persistent?," Macroeconomics 0507004, EconWPA.
  18. Bound, John & Krueger, Alan B, 1991. "The Extent of Measurement Error in Longitudinal Earnings Data: Do Two Wrongs Make a Right?," Journal of Labor Economics, University of Chicago Press, vol. 9(1), pages 1-24, January.
  19. Cochrane, John H, 1991. "A Simple Test of Consumption Insurance," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 957-76, October.
  20. Greg Kaplan, 2010. "Inequality and the Lifecycle," 2010 Meeting Papers 135, Society for Economic Dynamics.
  21. Huggett, Mark, 1996. "Wealth distribution in life-cycle economies," Journal of Monetary Economics, Elsevier, vol. 38(3), pages 469-494, December.
  22. Laurence Ales & Pricila Maziero, 2007. "Accounting for private information," 2007 Meeting Papers 804, Society for Economic Dynamics.
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Cited by:
  1. Gang Sun, . "Complete Markets Strikes Back: Revisiting Risk Sharing Tests under Discount Rate Heterogeneity," CDMA Working Paper Series 201310, Centre for Dynamic Macroeconomic Analysis.
  2. Gang Sun, . "Consumption Inequality and Discount Rate Heterogeneity," Discussion Paper Series, Department of Economics 201318, Department of Economics, University of St. Andrews.
  3. Theodoros M. Diasakos, . "Comparative Statics of Asset Prices: the effect of other assets' risk," Discussion Paper Series, Department of Economics 201315, Department of Economics, University of St. Andrews, revised 08 Jan 2014.
  4. repec:fip:fedreq:y:2011:i:3q:p:255-326:n:vol.97no.3 is not listed on IDEAS
  5. Carroll, Daniel R. & Young, Eric R., 2011. "The long run effects of changes in tax progressivity," Journal of Economic Dynamics and Control, Elsevier, vol. 35(9), pages 1451-1473, September.
  6. Laurence Ales & Maziero Pricila, . "Accounting for Private Information," GSIA Working Papers 2010-E58, Carnegie Mellon University, Tepper School of Business.
  7. Fatih Guvenen, 2011. "Macroeconomics with hetereogeneity : a practical guide," Economic Quarterly, Federal Reserve Bank of Richmond, issue 3Q, pages 255-326.

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