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Interpreting life-cycle inequality patterns as an efficient allocation: mission impossible?

  • Alejandro Badel
  • Mark Huggett

Data on consumption, earnings, wages and hours dispersion over the life cycle is commonly viewed as incompatible with a Pareto efficient allocation. We show that a model with preference and wage shocks and full insurance produces the rise in consumption, wages and hours dispersion over the life cycle 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.

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2010-046.

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Date of creation: 2010
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Handle: RePEc:fip:fedlwp:2010-046
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