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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: Roger Lagunoff Professor of Economics 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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References

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  1. Kjetil Storesletten & Chris Telmer & Amir Yaron, 1997. "Consumption and risk sharing over the life cycle," GSIA Working Papers, Carnegie Mellon University, Tepper School of Business 228, Carnegie Mellon University, Tepper School of Business.
  2. Heathcote, Jonathan & Storesletten, Kjetil & Violante, Giovanni L., 2008. "Insurance and opportunities: A welfare analysis of labor market risk," Journal of Monetary Economics, Elsevier, Elsevier, vol. 55(3), pages 501-525, April.
  3. Greg Kaplan, 2010. "Inequality and the Lifecycle," 2010 Meeting Papers 135, Society for Economic Dynamics.
  4. Huggett, Mark, 1996. "Wealth distribution in life-cycle economies," Journal of Monetary Economics, Elsevier, Elsevier, vol. 38(3), pages 469-494, December.
  5. Heathcote, Jonathan & Perri, Fabrizio & Violante, Giovanni L, 2009. "Unequal We Stand: An Empirical Analysis of Economic Inequality in the United States, 1967-2006," CEPR Discussion Papers 7538, C.E.P.R. Discussion Papers.
  6. 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, University of Chicago Press, vol. 9(1), pages 1-24, January.
  7. Mark Huggett & Gustavo Ventura & Amir Yaron, 2011. "Sources of Lifetime Inequality," American Economic Review, American Economic Association, vol. 101(7), pages 2923-54, December.
  8. 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.
  9. Mark Hugget & Gustavo Ventura & Amir Yaron, 2002. "Human Capital and Earnings Distribution Dynamics," NBER Working Papers 9366, National Bureau of Economic Research, Inc.
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  11. Yoram Ben-Porath, 1967. "The Production of Human Capital and the Life Cycle of Earnings," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 75, pages 352.
  12. Laurence Ales & Pricila Maziero, 2007. "Accounting for private information," 2007 Meeting Papers, Society for Economic Dynamics 804, Society for Economic Dynamics.
  13. Fatih Guvenen, 2005. "An Empirical Investigation of Labor Income Processes," Macroeconomics, EconWPA 0508026, EconWPA.
  14. Attanasio, Orazio & Davis, Steven J, 1996. "Relative Wage Movements and the Distribution of Consumption," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 104(6), pages 1227-62, December.
  15. Fatih Guvenen, 2005. "Learning Your Earning: Are Labor Income Shocks Really Very Persistent?," Macroeconomics, EconWPA 0507004, EconWPA.
  16. Mark Huggett & Juan Carols Parra, 2006. "How Well Does the US Social Insurance System Provide Social Insurance?," Working Papers, Georgetown University, Department of Economics gueconwpa~06-06-11, Georgetown University, Department of Economics.
  17. 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, University of Chicago Press, vol. 12(3), pages 345-68, July.
  18. Deaton, A. & Paxson, C., 1993. "Intertemporal Choice and Inequality," Papers, Princeton, Woodrow Wilson School - Development Studies 168, Princeton, Woodrow Wilson School - Development Studies.
  19. Fatih Guvenen & Anthony Smith, 2013. "Inferring labor income risk and partial insurance from economic choices," Staff Report, Federal Reserve Bank of Minneapolis 485, Federal Reserve Bank of Minneapolis.
  20. 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.
  21. Cochrane, John H, 1991. "A Simple Test of Consumption Insurance," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 99(5), pages 957-76, October.
  22. 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.
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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. Pricila Maziero & Laurence Ales, 2008. "Accounting for private information," Working Papers 663, Federal Reserve Bank of Minneapolis.
  3. 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.
  4. Carroll, Daniel R. & Young, Eric R., 2011. "The long run effects of changes in tax progressivity," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 35(9), pages 1451-1473, September.
  5. Gang Sun, . "Consumption Inequality and Discount Rate Heterogeneity," Discussion Paper Series, Department of Economics 201318, Department of Economics, University of St. Andrews.
  6. 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.
  7. repec:fip:fedreq:y:2011:i:3q:p:255-326:n:vol.97no.3 is not listed on IDEAS

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