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Nonlinear income variance profiles and consumption inequality over the life cycle

  • Abe, Naohito
  • Yamada, Tomoaki

In contrast to many other countries, consumption inequalities in Japan are not constant over household age but increase from around middle age--a fact first highlighted by Ohtake and Saito [Ohtake, F., Saito, M., 1998. Population aging and consumption inequality in Japan. Rev. Income Wealth 44, 361-381]. Given this information, we examine whether this phenomenon is consistent with the standard precautionary saving model developed by Carroll [Carroll, C.D., 1997. Buffer-stock savings and the life cycle/permanent income hypothesis. Quart. J. Econ. 62, 1-56]. Specifically, we investigate: (1) the degree of age dependence of idiosyncratic income risks; and (2) the importance of age dependence for the evolution of inequalities in consumption predicted by the household model of Carroll (1997). We find a strong age dependence of income risks, which creates a nonlinear age-variance profile of income, and the standard precautionary saving model is consistent with the observed consumption inequalities as long as we take the nonlinearity in age-variance profiles of income into account.

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Article provided by Elsevier in its journal Journal of the Japanese and International Economies.

Volume (Year): 23 (2009)
Issue (Month): 3 (September)
Pages: 344-366

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Handle: RePEc:eee:jjieco:v:23:y:2009:i:3:p:344-366
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