IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Income Risk, Income Mobility and Welfare

  • Tom Krebs

    ()

  • Pravin Krishna

    ()

  • William F. Maloney

    ()

This paper develops a framework for the quantitative analysis of individual income dynamics, mobility and welfare. Individual income is assumed to follow a stochastic process with two (unobserved) components, an i.i.d. component representing measurement error or transitory income shocks and an AR(1) component representing persistent changes in income. We use a tractable consumption-saving model with labor income risk and incomplete markets to relate income dynamics to consumption and welfare, and derive analytical expressions for income mobility and welfare as a function of the various parameters of the underlying income process. The empirical application of our framework using data on individual incomes from Mexico provides striking results. Much of measured income mobility is driven by measurement error or transitory income shocks and therefore (almost) welfare-neutral. A smaller part of measured income mobility is due to either welfare-reducing income risk or welfare-enhancing catching-up of low-income individuals with high-income individuals, both of which have economically significant effects on social welfare. Decomposing mobility into its fundamental components is thus seen to be crucial from the standpoint of welfare evaluation.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://economia.uniandes.edu.co/publicaciones/dcede2013-02.pdf
Download Restriction: no

Paper provided by UNIVERSIDAD DE LOS ANDES-CEDE in its series DOCUMENTOS CEDE with number 010495.

as
in new window

Length: 31
Date of creation: 21 Jan 2013
Date of revision:
Handle: RePEc:col:000089:010495
Contact details of provider:

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Peter Gottschalk & Enrico Spolare, 2001. "On the Evaluation of Economic Mobility," Working Papers 2001-25, Brown University, Department of Economics.
  2. Cuesta, Jose & Nopo, Hugo & Pizzolitto, Georgina, 2011. "Using Pseudo-Panels to Measure Income Mobility in Latin America," IZA Discussion Papers 5449, Institute for the Study of Labor (IZA).
  3. Tom Krebs, 2004. "Welfare Cost of Business Cycles When Markets Are Incomplete," Working Papers 2004-08, Brown University, Department of Economics.
  4. Dang, Hai-Anh & Lanjouw, Peter & Luoto, Jill & McKenzie, David, 2011. "Using repeated cross-sections to explore movements in and out of poverty," Policy Research Working Paper Series 5550, The World Bank.
  5. Cruces, Guillermo & Lanjouw, Peter & Lucchetti, Leonardo & Perova, Elizaveta & Vakis, Renos & Viollaz, Mariana, 2011. "Intra-generational mobility and repeated cross-sections : a three-country validation exercise," Policy Research Working Paper Series 5916, The World Bank.
  6. Angus Deaton & Christina Paxson, 1993. "Intertemporal Choice and Inequality," NBER Working Papers 4328, National Bureau of Economic Research, Inc.
  7. Gallant, A. Ronald, 1975. "Seemingly unrelated nonlinear regressions," Journal of Econometrics, Elsevier, vol. 3(1), pages 35-50, February.
  8. Michael Baker & Gary Solon, 2003. "Earnings Dynamics and Inequality among Canadian Men, 1976-1992: Evidence from Longitudinal Income Tax Records," Journal of Labor Economics, University of Chicago Press, vol. 21(2), pages 267-288, April.
  9. Antman, Francisca & McKenzie, David J., 2005. "Earnings mobility and measurement error : a pseudo-panel approach," Policy Research Working Paper Series 3745, The World Bank.
  10. Jonathan Heathcote & Kjetil Storesletten & Giovanni L. Violante, 2009. "Quantitative Macroeconomics with Heterogeneous Households," Annual Review of Economics, Annual Reviews, vol. 1(1), pages 319-354, 05.
  11. Tom Krebs, 2007. "Job Displacement Risk and the Cost of Business Cycles," American Economic Review, American Economic Association, vol. 97(3), pages 664-686, June.
  12. Benabou, R. & Ok, E.A., 1998. "Social Mobility and the Demand for Redistribution: The POUM Hypothesis," Working Papers 98-23, C.V. Starr Center for Applied Economics, New York University.
  13. Felix Kubler & Karl Schmedders, 2000. "Incomplete Markets, Transitory Shocks and Welfare," Levine's Working Paper Archive 2133, David K. Levine.
  14. Gary Fields & Paul Cichello & Samuel Freije & Marta Menéndez & David Newhouse, 2003. "For Richer or for Poorer? Evidence from Indonesia, South Africa, Spain, and Venezuela," Journal of Economic Inequality, Springer, vol. 1(1), pages 67-99, April.
  15. Heaton, John & Lucas, Deborah J, 1996. "Evaluating the Effects of Incomplete Markets on Risk Sharing and Asset Pricing," Journal of Political Economy, University of Chicago Press, vol. 104(3), pages 443-87, June.
  16. Dardanoni Valentino, 1993. "Measuring Social Mobility," Journal of Economic Theory, Elsevier, vol. 61(2), pages 372-394, December.
  17. Constantinides,George & Duffie,Darrel, 1992. "Asset pricing with heterogeneous consumers," Discussion Paper Serie A 381, University of Bonn, Germany.
  18. Chiara Binelli & Orazio Attanasio, 2010. "Mexico in the 1990s: the Main Cross-Sectional Facts," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(1), pages 238-264, January.
  19. Carroll, Christopher D. & Samwick, Andrew A., 1997. "The nature of precautionary wealth," Journal of Monetary Economics, Elsevier, vol. 40(1), pages 41-71, September.
  20. Aiyagari, S Rao, 1994. "Uninsured Idiosyncratic Risk and Aggregate Saving," The Quarterly Journal of Economics, MIT Press, vol. 109(3), pages 659-84, August.
  21. Geweke, John & Marshall, Robert C & Zarkin, Gary A, 1986. "Mobility Indices in Continuous Time Markov Chains," Econometrica, Econometric Society, vol. 54(6), pages 1407-23, November.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:col:000089:010495. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Universidad De Los Andes-Cede)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.