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Interpreting Life-Cycle Inequality Patterns asan Efficient Allocation: Mission Impossible?

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.

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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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Georgetown University Department of Economics Washington, DC 20057-1036

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  1. Mark Hugget & Gustavo Ventura & Amir Yaron, 2002. "Human Capital and Earnings Distribution Dynamics," NBER Working Papers 9366, National Bureau of Economic Research, Inc.
  2. Kjetil Storesletten & Chris Telmer & Amir Yaron, 1997. "Consumption and risk sharing over the life cycle," GSIA Working Papers 228, Carnegie Mellon University, Tepper School of Business.
  3. Fatih Guvenen, 2005. "An Empirical Investigation of Labor Income Processes," Macroeconomics 0508026, EconWPA.
  4. Attanasio, Orazio & Davis, Steven J, 1996. "Relative Wage Movements and the Distribution of Consumption," Journal of Political Economy, University of Chicago Press, vol. 104(6), pages 1227-62, December.
  5. Laurence Ales & Maziero Pricila, . "Accounting for Private Information," GSIA Working Papers 2010-E58, Carnegie Mellon University, Tepper School of Business.
  6. John Bound & Alan B. Krueger, 1989. "The Extent of Measurement Error In Longitudinal Earnings Data: Do Two Wrongs Make A Right?," NBER Working Papers 2885, National Bureau of Economic Research, Inc.
  7. 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.
  8. 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.
  9. Angus Deaton & Christina Paxson, 1993. "Intertemporal Choice and Inequality," NBER Working Papers 4328, National Bureau of Economic Research, Inc.
  10. Fatih Guvenen, 2006. "Learning your earning: are labor income shocks really very persistent?," Discussion Paper / Institute for Empirical Macroeconomics 145, Federal Reserve Bank of Minneapolis.
  11. Fatih Guvenen & Anthony Smith, 2013. "Inferring labor income risk and partial insurance from economic choices," Staff Report 485, Federal Reserve Bank of Minneapolis.
  12. Mark Huggett & Juan Carols Parra, 2006. "How Well Does the US Social Insurance System Provide Social Insurance?," Working Papers gueconwpa~06-06-11, Georgetown University, Department of Economics.
  13. Mark Huggett & Gustavo Ventura & Amir Yaron, 2010. "Sources of Lifetime Inequality," Working Papers 2011-020, Human Capital and Economic Opportunity Working Group.
  14. Martin Browning & Lars Peter Hansen & James J. Heckman, 1999. "Micro Data and General Equilibrium Models," Discussion Papers 99-10, University of Copenhagen. Department of Economics.
  15. Greg Kaplan, 2012. "Inequality and the life cycle," Quantitative Economics, Econometric Society, vol. 3(3), pages 471-525, November.
  16. Jonathan Heathcote & Kjetil Storesletten & Giovanni L. Violante, 2007. "Insurance and Opportunities: A Welfare Analysis of Labor Market Risk," NBER Working Papers 13673, National Bureau of Economic Research, Inc.
  17. Yoram Ben-Porath, 1967. "The Production of Human Capital and the Life Cycle of Earnings," Journal of Political Economy, University of Chicago Press, vol. 75, pages 352.
  18. Cochrane, John H, 1991. "A Simple Test of Consumption Insurance," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 957-76, October.
  19. Huggett, Mark, 1996. "Wealth distribution in life-cycle economies," Journal of Monetary Economics, Elsevier, vol. 38(3), pages 469-494, December.
  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. 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, vol. 12(3), pages 345-68, July.
  22. 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.
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