Working Paper: NBER ID: w15257
Authors: Jonathan Heathcote; Kjetil Storesletten; Giovanni L. Violante
Abstract: This paper studies consumption and labor supply in a model where agents have partial insurance and face risk and initial heterogeneity in wages and preferences. Equilibrium allocations and variances and covariances of wages, hours and consumption are solved for analytically. We prove that all parameters of the structural model are identified given panel data on wages and hours, and cross-sectional data on consumption. The model is estimated on US data. Second moments involving hours and consumption show that the rise in wage dispersion in the 1970s was effectively insured by households, while the rise in the 1980s was not.
Keywords: consumption; labor supply; partial insurance; wage dispersion
JEL Codes: E21; J22; J31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| rise in wage dispersion in the 1970s (J31) | households effectively insured wage risks (G52) |
| rise in wage dispersion in the 1980s (J31) | households did not insure wage risks (G52) |
| preference heterogeneity (D11) | cross-sectional dispersion in consumption and hours (J29) |
| equilibrium allocations for consumption, earnings, and hours (J29) | log-linear in latent random variables (C29) |
| preference dispersion (D11) | empirical correlation between consumption and hours (D12) |