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Testing functional forms of the lifetime income process in the presence of factor loadings

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  • Yuri Ostrovsky

    (Statistics Canada)

Abstract

I show that a covariance-based test typically used to distinguish between lifetime income models known as Heterogeneous Income Profiles and Restricted Income Profiles will lead to erroneous conclusions in the presence of time-varying factor loadings on the permanent earnings component. The magnitude of a potential estimation bias associated with this test is examined using a Monte-Carlo simulation exercise.

Suggested Citation

  • Yuri Ostrovsky, 2020. "Testing functional forms of the lifetime income process in the presence of factor loadings," Empirical Economics, Springer, vol. 59(1), pages 1-10, July.
    • Handle: RePEc:spr:empeco:v:59:y:2020:i:1:d:10.1007_s00181-019-01625-4
    DOI: 10.1007/s00181-019-01625-4
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    References listed on IDEAS

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    More about this item

    Keywords

    Lifetime income profiles; Monte-Carlo simulation methods; Generalized method of moments (GMM);
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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