Consumption and Labor Supply with Partial Insurance: An Analytical Framework

Similar documents
From Wages to Welfare: Decomposing Gains and Losses From Rising Inequality

How Much Insurance in Bewley Models?

Online Appendix. Revisiting the Effect of Household Size on Consumption Over the Life-Cycle. Not intended for publication.

Determinants of Wage and Earnings Inequality in the United States

Labor Economics Field Exam Spring 2011

Heterogeneous Firm, Financial Market Integration and International Risk Sharing

Financing Medicare: A General Equilibrium Analysis

Asset Pricing with Heterogeneous Consumers

Monetary Economics Final Exam

Atkeson, Chari and Kehoe (1999), Taxing Capital Income: A Bad Idea, QR Fed Mpls

Estimating Macroeconomic Models of Financial Crises: An Endogenous Regime-Switching Approach

Lecture 2. (1) Permanent Income Hypothesis. (2) Precautionary Savings. Erick Sager. September 21, 2015

Credit Crises, Precautionary Savings and the Liquidity Trap October (R&R Quarterly 31, 2016Journal 1 / of19

Idiosyncratic risk, insurance, and aggregate consumption dynamics: a likelihood perspective

Achieving Actuarial Balance in Social Security: Measuring the Welfare Effects on Individuals

NBER WORKING PAPER SERIES HOW MUCH CONSUMPTION INSURANCE BEYOND SELF-INSURANCE? Greg Kaplan Giovanni L. Violante

Optimal Income Taxation: Mirrlees Meets Ramsey. Working Paper January 2017

Sang-Wook (Stanley) Cho

Macroeconomic Implications of Tax Cuts for the Top Income Groups:

Risks for the Long Run: A Potential Resolution of Asset Pricing Puzzles

The Role of Investment Wedges in the Carlstrom-Fuerst Economy and Business Cycle Accounting

Does the Social Safety Net Improve Welfare? A Dynamic General Equilibrium Analysis

MACROECONOMICS. Prelim Exam

The Common Factor in Idiosyncratic Volatility:

Earnings Dynamics, Mobility Costs and Transmission of Firm and Market Level Shocks

Optimal Income Taxation: Mirrlees Meets Ramsey

Entry, Trade Costs and International Business Cycles

State-Dependent Fiscal Multipliers: Calvo vs. Rotemberg *

Keynesian Views On The Fiscal Multiplier

Sang-Wook (Stanley) Cho

A Model with Costly-State Verification

Household Debt, Financial Intermediation, and Monetary Policy

The Role of Investment Wedges in the Carlstrom-Fuerst Economy and Business Cycle Accounting

Reforming the Social Security Earnings Cap: The Role of Endogenous Human Capital

Optimal Income Taxation: Mirrlees Meets Ramsey

Problem Set 3. Thomas Philippon. April 19, Human Wealth, Financial Wealth and Consumption

Comprehensive Exam. August 19, 2013

Monetary Policy According to HANK

. Social Security Actuarial Balance in General Equilibrium. S. İmrohoroğlu (USC) and S. Nishiyama (CBO)

Heterogeneity in Labor Supply Elasticity and Optimal Taxation

Optimal Progressivity with Age-Dependent Taxation

Consumption and House Prices in the Great Recession: Model Meets Evidence

INTERTEMPORAL ASSET ALLOCATION: THEORY

1 Roy model: Chiswick (1978) and Borjas (1987)

Wealth inequality, family background, and estate taxation

1 Dynamic programming

Frequency of Price Adjustment and Pass-through

Exchange Rates and Fundamentals: A General Equilibrium Exploration

Lecture 2: Stochastic Discount Factor

Business Cycles and Household Formation: The Micro versus the Macro Labor Elasticity

What Can Rational Investors Do About Excessive Volatility and Sentiment Fluctuations?

Precautionary Savings or Working Longer Hours?

House Prices and Risk Sharing

EIEF Working Paper 07/10 March Tax Buyouts

Nonlinear Persistence and Partial Insurance: Income and Consumption Dynamics in the PSID

The Transmission of Monetary Policy through Redistributions and Durable Purchases

How Much Consumption Insurance in Bewley Models with Endogenous Family Labor Supply?

Idiosyncratic risk and the dynamics of aggregate consumption: a likelihood-based perspective

Growth Opportunities, Investment-Specific Technology Shocks and the Cross-Section of Stock Returns

Aging, Social Security Reform and Factor Price in a Transition Economy

Is Debt Overhang a Problem for Monetary Policy?

A Macroeconomic Framework for Quantifying Systemic Risk. June 2012

NBER WORKING PAPER SERIES STRATEGIC ASSET ALLOCATION IN A CONTINUOUS-TIME VAR MODEL. John Y. Campbell George Chacko Jorge Rodriguez Luis M.

Consumption and Portfolio Decisions When Expected Returns A

Home Ownership, Savings and Mobility Over The Life Cycle

Debt Covenants and the Macroeconomy: The Interest Coverage Channel

Identifying Long-Run Risks: A Bayesian Mixed-Frequency Approach

Balance Sheet Recessions

General Examination in Macroeconomic Theory SPRING 2016

TRADE LIBERALIZATION, INCOME RISK, AND MOBILITY

The Cross-Sectional Implications of Rising Wage Inequality in the United States

The Term Structure of Real Rates andexpectedinßation

State Dependency of Monetary Policy: The Refinancing Channel

Interest rate policies, banking and the macro-economy

How Do Consumers Respond To Transitory Income Shocks? Reconciling Longitudinal Studies and Natural Experiments

Habit Formation in State-Dependent Pricing Models: Implications for the Dynamics of Output and Prices

Excess Smoothness of Consumption in an Estimated Life Cycle Model

Relating Income to Consumption Part 1

ON THE ASSET ALLOCATION OF A DEFAULT PENSION FUND

Macroeconomics 2. Lecture 12 - Idiosyncratic Risk and Incomplete Markets Equilibrium April. Sciences Po

Is the Maastricht debt limit safe enough for Slovakia?

Online Appendix for The Heterogeneous Responses of Consumption between Poor and Rich to Government Spending Shocks

Groupe de Travail: International Risk-Sharing and the Transmission of Productivity Shocks

Trade Liberalization and Labor Market Dynamics

Fiscal Cost of Demographic Transition in Japan

Partial Insurance. ECON 34430: Topics in Labor Markets. T. Lamadon (U of Chicago) Fall 2017

The Macroeconomic Implications of Rising Wage Inequality in the United States *

Appendix to: Long-Run Asset Pricing Implications of Housing Collateral Constraints

Return to Capital in a Real Business Cycle Model

How Do Consumers Respond To Transitory Income Shocks? Reconciling Longitudinal Studies and Natural Experiments

Earnings Inequality and the Minimum Wage: Evidence from Brazil

NBER WORKING PAPER SERIES OPTIMAL TAX PROGRESSIVITY: AN ANALYTICAL FRAMEWORK. Jonathan Heathcote Kjetil Storesletten Giovanni L.

Excess Smoothness of Consumption in an Estimated Life Cycle Model

Social Security and Inequality over the Life Cycle. Angus Deaton Pierre-Olivier Gourinchas Christina Paxson. Princeton University

Explaining basic asset pricing facts with models that are consistent with basic macroeconomic facts

The Lost Generation of the Great Recession

Leverage, Re-leveraging, and Household Spending

STATE UNIVERSITY OF NEW YORK AT ALBANY Department of Economics. Ph. D. Comprehensive Examination: Macroeconomics Spring, 2009

Question 1 Consider an economy populated by a continuum of measure one of consumers whose preferences are defined by the utility function:

Asset Pricing under Information-processing Constraints

Transcription:

Consumption and Labor Supply with Partial Insurance: An Analytical Framework Jonathan Heathcote Federal Reserve Bank of Minneapolis, CEPR Kjetil Storesletten Federal Reserve Bank of Minneapolis, CEPR Gianluca Violante New York University, CEPR, and NBER Conference in Honor of Thomas Sargent and Christopher Sims Federal Reserve Bank of Minneapolis, May 4-5 2012 Heathcote-Storesletten-Violante, Consumption and Labor Supply with Partial Insurance p. 1 /20

Measurement of risk sharing Three broad questions: 1. Fraction of individual shocks that transmits to consumption 2. Insurability nature of the recent increase in US inequality 3. Life-cycle shocks vs. initial conditions in determining inequality Heathcote-Storesletten-Violante, Consumption and Labor Supply with Partial Insurance p. 2 /20

Measurement of risk sharing Two complementary approaches: 1. Structural model risk sharing as equilibrium outcome Sensitive to assumed market structure and insurance channels Heathcote-Storesletten-Violante, Consumption and Labor Supply with Partial Insurance p. 3 /20

Measurement of risk sharing Two complementary approaches: 1. Structural model risk sharing as equilibrium outcome Sensitive to assumed market structure and insurance channels 2. Quantify overall risk sharing from data agnostic about sources Requires long, high-quality panel data on (c, y) Heathcote-Storesletten-Violante, Consumption and Labor Supply with Partial Insurance p. 3 /20

Our approach: Bewley meets Deaton 1. Structural equilibrium model with non-contingent bond, labor supply, and redistributive taxation 2. Flexible financial market structure that does not hardwire agents access to insurance Heathcote-Storesletten-Violante, Consumption and Labor Supply with Partial Insurance p. 4 /20

Our approach: Bewley meets Deaton 1. Structural equilibrium model with non-contingent bond, labor supply, and redistributive taxation 2. Flexible financial market structure that does not hardwire agents access to insurance Analytical tractability Closed-form equilibrium cross-sectional (co-)variances of (w, h, c) Heathcote-Storesletten-Violante, Consumption and Labor Supply with Partial Insurance p. 4 /20

Our approach: Bewley meets Deaton 1. Structural equilibrium model with non-contingent bond, labor supply, and redistributive taxation 2. Flexible financial market structure that does not hardwire agents access to insurance Analytical tractability Closed-form equilibrium cross-sectional (co-)variances of (w, h, c) Labor supply data informative about risk-sharing Like c, h react differently to insurable vs. uninsurable shocks to w Heathcote-Storesletten-Violante, Consumption and Labor Supply with Partial Insurance p. 4 /20

ECONOMIC ENVIRONMENT Heathcote-Storesletten-Violante, Consumption and Labor Supply with Partial Insurance p. 5 /20

Demographics and preferences Perpetual youth demographics with constant survival probability δ Preferences over sequences of consumption and hours worked: E b (βδ) t b u(c t,h t ;ϕ) t=b u(c t,h t ;ϕ) = c1 γ t 1 1 γ exp(ϕ) h1+σ t 1+σ where ϕ F ϕ,b is distaste for work relative to consumption Heathcote-Storesletten-Violante, Consumption and Labor Supply with Partial Insurance p. 6 /20

Technology and individual endowments Technology: linear in aggregate effective labor Competitive labor market: wage = individual productivity Heathcote-Storesletten-Violante, Consumption and Labor Supply with Partial Insurance p. 7 /20

Technology and individual endowments Technology: linear in aggregate effective labor Competitive labor market: wage = individual productivity Individual wage: sum of two orthogonal components (in logs): logw t = α t +ε t Heathcote-Storesletten-Violante, Consumption and Labor Supply with Partial Insurance p. 7 /20

Technology and individual endowments Technology: linear in aggregate effective labor Competitive labor market: wage = individual productivity Individual wage: sum of two orthogonal components (in logs): logw t = α t +ε t α t = α t 1 +ω t with ω t F ω,t Heathcote-Storesletten-Violante, Consumption and Labor Supply with Partial Insurance p. 7 /20

Technology and individual endowments Technology: linear in aggregate effective labor Competitive labor market: wage = individual productivity Individual wage: sum of two orthogonal components (in logs): logw t = α t +ε t α t = α t 1 +ω t with ω t F ω,t ε t = κ t +θ t with θ t F θ,t κ t = κ t 1 +η t with η t F η,t At labor market entry, agents draw α 0 F α0,b and κ 0 F κ0,b Heathcote-Storesletten-Violante, Consumption and Labor Supply with Partial Insurance p. 7 /20

Private risk-sharing 1. Non-state-contingent bond traded in zero net supply 2. Insurance claims tarded against shocks to ε only Captures other (residual) insurance arrangements: financial markets, spousal labor supply, family transfers, etc. Partial insurance: between bond economy and complete markets Heathcote-Storesletten-Violante, Consumption and Labor Supply with Partial Insurance p. 8 /20

Government Government: runs a progressive tax/transfer scheme Redistribution and financing of (non-valued) expenditures G t Two-parameter function maps pre-government earnings (y = wh) to disposable earnings (ỹ) ỹ = λy 1 τ τ measure the degree of progressivity Heathcote-Storesletten-Violante, Consumption and Labor Supply with Partial Insurance p. 9 /20

EQUILIBRIUM Heathcote-Storesletten-Violante, Consumption and Labor Supply with Partial Insurance p. 10 /20

Equilibrium In equilibrium, there is no bond trade among households Sharp dichotomy between shocks: (α t,ϕ) uninsured privately, while ε t perfectly insured Heathcote-Storesletten-Violante, Consumption and Labor Supply with Partial Insurance p. 11 /20

Equilibrium In equilibrium, there is no bond trade among households Sharp dichotomy between shocks: (α t,ϕ) uninsured privately, while ε t perfectly insured We can solve for equilibrium allocations and prices in closed-form Heathcote-Storesletten-Violante, Consumption and Labor Supply with Partial Insurance p. 11 /20

Link to Constantinides and Duffie (1996) (i) CRRA prefs, (ii) unit root shocks to log disposable income, (iii) zero initial wealth, (iv) wealth in ZNS no bond-trade equilibrium Heathcote-Storesletten-Violante, Consumption and Labor Supply with Partial Insurance p. 12 /20

Link to Constantinides and Duffie (1996) (i) CRRA prefs, (ii) unit root shocks to log disposable income, (iii) zero initial wealth, (iv) wealth in ZNS no bond-trade equilibrium Our environment micro-founds unit root disposable income: 1. Primitive exogenous process: wages 2. Labor supply: exogenous wages endogenous earnings 3. Non-linear taxation: pre-tax earnings after-tax earnings 4. Private risk-sharing: earnings post-trade disposable income 5. No bond-trade: disposable income = consumption Heathcote-Storesletten-Violante, Consumption and Labor Supply with Partial Insurance p. 12 /20

Hours worked logh a t (ϕ,α,ε) = ˆϕ+ ( ) 1 γ σ +γ α+ 1 σ ε+ha t where ˆϕ ϕ σ+γ and 1 σ 1 τ σ+τ Hours worked decrease in effort cost ϕ Response to ε proportional to tax-modified Frisch elasticity Response to α depends on γ which controls wealth effect Heathcote-Storesletten-Violante, Consumption and Labor Supply with Partial Insurance p. 13 /20

Consumption logc a t (ϕ,α,ε) = (1 τ) ˆϕ+(1 τ) ( ) 1+ σ σ +γ α+c a t Independent of the insurable shock ε Effect of ˆϕ mediated by tax progressivity Response to α mediated by labor supply and tax progressivity Random walk, displays excess smoothness relative to PIH Heathcote-Storesletten-Violante, Consumption and Labor Supply with Partial Insurance p. 14 /20

ANSWERS TO THE THREE QUESTIONS Heathcote-Storesletten-Violante, Consumption and Labor Supply with Partial Insurance p. 15 /20

Pass-through coefficient Pass-through from permanent wage shocks to consumption: φ w,c t cov( c t,ω t +η t ) var(ω t +η t ) Heathcote-Storesletten-Violante, Consumption and Labor Supply with Partial Insurance p. 16 /20

Pass-through coefficient Pass-through from permanent wage shocks to consumption: φ w,c t cov( c t,ω t +η t ) var(ω t +η t ) = (1 τ) 1+ σ σ +γ v ωt v ωt +v ηt progressive taxation 0.73 labor supply 0.87 private insurance 0.63 Overall, we estimate: φ w,c t = 0.40 Heathcote-Storesletten-Violante, Consumption and Labor Supply with Partial Insurance p. 16 /20

Risk-sharing over time 0.55 Variance of Log Wages 0.3 Variance of Log Consumption 0.6 Insurable Fraction of Cross sectional Wage Dispersion 0.5 0.55 0.45 0.25 0.5 0.45 0.4 0.2 0.4 0.35 0.15 0.35 0.3 0.25 Data Model 0.1 Data Model 0.3 0.25 0.2 0.2 0.05 1970 1975 1980 1985 1990 1995 2000 2005 Year 1970 1975 1980 1985 1990 1995 2000 2005 Year 0.15 1970 1975 1980 1985 1990 1995 2000 2005 Year var t (w) = var t (α)+var t (ε)+v µy +v µh ( ) 2 var t (c) = (1 τ) 2 var t (ˆϕ)+(1 τ) 2 1+ σ var t (α)+v µc σ +γ Heathcote-Storesletten-Violante, Consumption and Labor Supply with Partial Insurance p. 17 /20

Risk-sharing over time 0.55 Variance of Log Wages 0.1 Correlation between Log Wages & Log Hours 0.6 Insurable Fraction of Cross sectional Wage Dispersion 0.5 0.05 0.55 0.45 0 0.5 0.4 0.35 0.3 Data Model 0.05 0.1 0.15 0.2 Data Model 0.45 0.4 0.35 0.3 0.25 0.25 0.25 0.2 0.2 1970 1975 1980 1985 1990 1995 2000 2005 Year 0.3 1970 1975 1980 1985 1990 1995 2000 2005 Year 0.15 1970 1975 1980 1985 1990 1995 2000 2005 Year var t (w) = var t (α)+var t (ε)+v µy +v µh cov t (w,h) = ( ) 1 γ var t (α)+ 1 σ σ +γ var t(ε) v µh Heathcote-Storesletten-Violante, Consumption and Labor Supply with Partial Insurance p. 18 /20

Lifecycle inequality decomposition Total Variance Percent Contribution to Total Variance Initial Heterogeneity Life-Cycle Measurement Preferences Productivity Shocks Error var(log w) 0.35 0 40 50 10 var(log h) 0.11 46 6 15 33 var(log c) 0.16 17 30 20 33 All components are orthogonal decomposition is unique Heathcote-Storesletten-Violante, Consumption and Labor Supply with Partial Insurance p. 19 /20

Why preference heter. is a source of inequality cov t (w,h) = ( ) 1 γ var t (α)+ 1 σ σ +γ var t(ε) v µh < 0 cov t (h,c) = (1 τ)var t (ˆϕ)+ (1 τ)(1+ σ)(1 γ) ( σ +γ) 2 var t (α) > 0 γ = 1.5 var t (ˆϕ) > 0 Heathcote-Storesletten-Violante, Consumption and Labor Supply with Partial Insurance p. 20 /20