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Interpreting Life-Cycle Inequality Patterns asan Efficient Allocation: Mission Impossible?

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Abstract

Data on consumption, earnings, wages and hours dispersion over the life cycle has been viewed as being at odds with an efficient allocation. We challenge this view. We show that a model with preference and wage shocks and full insurance produces the type of inequality patterns across age groups 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. Classification-JEL Codes: E21, D91, D52

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Bibliographic Info

Paper provided by Georgetown University, Department of Economics in its series Working Papers with number gueconwpa~07-07-03.

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Date of creation: 03 Jul 2007
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Handle: RePEc:geo:guwopa:gueconwpa~07-07-03

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Postal: Georgetown University Department of Economics Washington, DC 20057-1036
Phone: 202-687-6074
Fax: 202-687-6102
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Web page: http://econ.georgetown.edu/

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Postal: Marcia Suss Administrative Officer Georgetown University Department of Economics Washington, DC 20057-1036
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Web: http://econ.georgetown.edu/

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Keywords: Life Cycle Inequality; Efficient Allocation; Preference Shocks;

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  1. Angus Deaton & Christina Paxson, 1993. "Intertemporal Choice and Inequality," NBER Working Papers 4328, National Bureau of Economic Research, Inc.
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  17. 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.
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  20. Fatih Guvenen & Anthony Smith, 2013. "Inferring labor income risk and partial insurance from economic choices," Staff Report 485, Federal Reserve Bank of Minneapolis.
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Cited by:
  1. 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.
  2. 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.
  3. 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.
  4. Laurence Ales & Maziero Pricila, . "Accounting for Private Information," GSIA Working Papers 2010-E58, Carnegie Mellon University, Tepper School of Business.
  5. Fatih Guvenen, 2011. "Macroeconomics With Heterogeneity: A Practical Guide," NBER Working Papers 17622, National Bureau of Economic Research, Inc.
  6. Gang Sun, . "Consumption Inequality and Discount Rate Heterogeneity," Discussion Paper Series, Department of Economics 201318, Department of Economics, University of St. Andrews.
  7. repec:fip:fedreq:y:2011:i:3q:p:255-326:n:vol.97no.3 is not listed on IDEAS

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