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Interpreting life-cycle inequality patterns as an efficient allocation: mission impossible?

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  • Alejandro Badel
  • Mark Huggett

Abstract

Data on consumption, earnings, wages and hours dispersion over the life cycle is commonly viewed as incompatible with a Pareto efficient allocation. We show that a model with preference and wage shocks and full insurance produces the rise in consumption, wages and hours dispersion over the life cycle found in U.S. data. The efficient allocation model requires an increasing preference shifter dispersion profile to account for an increasing consumption dispersion profile. We examine U.S. data and find support for the view that the dispersion in preference shifters increases with age.

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Bibliographic Info

Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2010-046.

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Date of creation: 2010
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Handle: RePEc:fip:fedlwp:2010-046

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Keywords: Consumption (Economics) ; Econometric models;

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  1. Mark Huggett & Juan Carlos Parra, 2010. "How Well Does the U.S. Social Insurance System Provide Social Insurance?," Journal of Political Economy, University of Chicago Press, vol. 118(1), pages 76-112, 02.
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  8. Greg Kaplan, 2007. "Inequality and the Lifecycle," 2007 Meeting Papers 262, Society for Economic Dynamics.
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  12. Deaton, A. & Paxson, C., 1993. "Intertemporal Choice and Inequality," Papers 168, Princeton, Woodrow Wilson School - Development Studies.
  13. Laurence Ales & Pricila Maziero, 2007. "Accounting for private information," 2007 Meeting Papers 804, Society for Economic Dynamics.
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Citations

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Cited by:
  1. Fatih Guvenen, 2011. "Macroeconomics With Heterogeneity: A Practical Guide," NBER Working Papers 17622, National Bureau of Economic Research, Inc.
  2. Laurence Ales & Pricila Maziero, 2007. "Accounting for private information," 2007 Meeting Papers 804, Society for Economic Dynamics.
  3. repec:fip:fedreq:y:2011:i:3q:p:255-326:n:vol.97no.3 is not listed on IDEAS
  4. 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.
  5. Gang Sun, . "Consumption Inequality and Discount Rate Heterogeneity," CDMA Working Paper Series 201311, Centre for Dynamic Macroeconomic Analysis.
  6. Gang Sun, 2012. "Complete Markets Strikes Back: Revisiting Risk Sharing Tests under Discount Rate Heterogeneity," Discussion Paper Series, Department of Economics 201317, Department of Economics, University of St. Andrews, revised 26 Feb 2013.
  7. 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.

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