Seminar Papers, Institute for International Economic Studies, Stockholm University
Consumption and Risk Sharing Over the Life Cycle
(), Chris Telmer
() and Amir Yaron
Abstract: A striking feature of U.S. data on income and consumption
is that inequality increases with age. Using both panel data and an
equilibrium life cycle model, we argue that this is informative for
understanding the importance and the characteristics of idiosyncratic labor
market risk. We find that uncertainty distributed throughout the working
years accounts for 40 percent of lifetime uncertainty, with the remainder
being realized prior to entering the labor market. We estimate that shocks
received over the life cycle cointain a highly persistent component, with
an autocorrelation coefficient between 0.98 and unity. The joint behavior
of earnings and consumption inequality, interpreted using our model, adds
to the body of evidence suggesting that labor market risk are imperfectly
pooled and that a precautionary motive is an important aspect of U.S.
savings behavior. The restrictions imposed by general equilibrium theory
play an important role in arriving at each of these conclusions.
Keywords: Risk sharing; income and consumption inequality; idiosyncratic risk; (follow links to similar papers)
JEL-Codes: D31; E21; (follow links to similar papers)
52 pages, February 12, 2002
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- This paper is forthcoming as:
Storesletten, Kjetil, Chris Telmer and Amir Yaron, 'Consumption and Risk Sharing Over the Life Cycle', Journal of Monetary Economics.
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