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Income Mobility and Welfare

  • Krebs, Tom
  • Krishna, Pravin
  • Maloney, William F.

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 lowincome 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.

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Paper provided by University of Mannheim, Department of Economics in its series Working Papers with number 13-02.

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Date of creation: 2013
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Handle: RePEc:mnh:wpaper:32928
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  14. Cuesta, Jose & Nopo, Hugo R. & Pizzolitto, Georgina, 2011. "Using Pseudo-Panels to Measure Income Mobility in Latin America," IZA Discussion Papers 5449, Institute for the Study of Labor (IZA).
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  20. Slesnick, Daniel T, 1986. "Welfare Distributional Change and the Measurement of Social Mobility," The Review of Economics and Statistics, MIT Press, vol. 68(4), pages 586-93, November.
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  24. 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.
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  28. 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.
  29. 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.
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  31. Markandya, Anil, 1982. "Intergenerational exchange mobility and economic welfare," European Economic Review, Elsevier, vol. 17(3), pages 307-324.
  32. Tom Krebs, 2004. "Welfare Cost of Business Cycles When Markets Are Incomplete," Working Papers 2004-08, Brown University, Department of Economics.
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