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Consumption and Risk Sharing Over the Life Cycle

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  • Storesletten, Kjetil

    ()
    (Institute for International Economic Studies, Stockholm University)

  • Telmer, Chris

    ()
    (Graduate School of Industrial Administration, Carnegie Mellon University)

  • Yaron, Amir

    ()
    (Wharton School, University of Pennsylvania)

Abstract

A striking feature of U.S. data on income and consumption is that inequality increases with age. Using both panel data and an equilibrium life cycle model, we argue that this is informative for understanding the importance and the characteristics of idiosyncratic labor market risk. We find that uncertainty distributed throughout the working years accounts for 40 percent of lifetime uncertainty, with the remainder being realized prior to entering the labor market. We estimate that shocks received over the life cycle cointain a highly persistent component, with an autocorrelation coefficient between 0.98 and unity. The joint behavior of earnings and consumption inequality, interpreted using our model, adds to the body of evidence suggesting that labor market risk are imperfectly pooled and that a precautionary motive is an important aspect of U.S. savings behavior. The restrictions imposed by general equilibrium theory play an important role in arriving at each of these conclusions.

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Bibliographic Info

Paper provided by Stockholm University, Institute for International Economic Studies in its series Seminar Papers with number 702.

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Length: 52 pages
Date of creation: 12 Feb 2002
Date of revision:
Publication status: Forthcoming in Journal of Monetary Economics, 2004.
Handle: RePEc:hhs:iiessp:0702

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Postal: Institute for International Economic Studies, Stockholm University, S-106 91 Stockholm, Sweden
Phone: +46-8-162000
Fax: +46-8-161443
Web page: http://www.iies.su.se/
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Keywords: Risk sharing; income and consumption inequality; idiosyncratic risk;

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