scholarly journals On the Persistence of Income Shocks Over the Life Cycle: Evidence, Theory, and Implications Second Version

2011 ◽  
Author(s):  
Yasar Fatih Karahan ◽  
Serdar Ozkan
Keyword(s):  
Life Cycle ◽  
Evidence Theory ◽  
Income Shocks

scholarly journals Learning Your Earning: Are Labor Income Shocks Really Very Persistent?

2007 ◽  
Vol 97 (3) ◽  
pp. 687-712 ◽  
Author(s):  
Fatih Guvenen
Keyword(s):  
Life Cycle ◽  
Current Literature ◽  
Previous Literature ◽  
Labor Income ◽  
Income Shocks ◽  
Life Cycle Model ◽  
Cycle Model ◽  
Consumption Data ◽  
Hip Process

The current literature offers two views on the nature of the labor income process. According to the first view, individuals are subject to very persistent income shocks while facing similar life-cycle income profiles (the RIP process, Thomas MaCurdy 1982). According to the alternative, individuals are subject to shocks with modest persistence while facing individual-specific profiles (the HIP process, Lee A. Lillard and Yoram A. Weiss 1979). In this paper we study the restrictions imposed by these two processes on consumption data—in the context of a life-cycle model—to distinguish between the two views. We find that the life-cycle model with a HIP process, which has not been studied in the previous literature, is consistent with several features of consumption data, whereas the model with a RIP process is consistent with some, but not with others. We conclude that the HIP model could be a credible contender to—and along some dimensions, a more coherent alternative than—the RIP model. (JEL D83, D91, E21, J31)

scholarly journals Occupation-Level Income Shocks and Asset Returns: Their Covariance and Implications for Portfolio Choice

2013 ◽  
Vol 03 (03n04) ◽  
pp. 1350011 ◽  
Author(s):  
Steven J. Davis ◽  
Paul Willen
Keyword(s):  
Life Cycle ◽  
Portfolio Choice ◽  
Cross Sections ◽  
Asset Returns ◽  
Equity Returns ◽  
Income Shocks ◽  
Graphical Approach ◽  
Risky Assets ◽  
Bond Returns ◽  
Occupation Level

This paper develops and applies a simple graphical approach to portfolio selection that accounts for covariance between asset returns and an investor's labor income. Our graphical approach easily handles income shocks that are partly hedgable, multiple risky assets, many periods and life cycle considerations. We apply the approach to occupation-level components of individual income innovations estimated from repeated cross-sections of the current population survey. We characterize several properties of these innovations, including their covariance with aggregate equity returns, long-term bond returns, and returns on several other assets. Aggregate equity returns are uncorrelated with the occupation-level income innovations, but a portfolio formed on firm size is significantly correlated with income innovations for several occupations, and so are selected industry-level equity portfolios. An application of the theory to the empirical results shows (a) large predicted levels of risky asset holdings compared to observed levels, (b) considerable variation in optimal portfolio allocations over the life cycle, and (c) large departures from the two-fund separation principle.

scholarly journals Sources of Income Persistence: Evidence from Rural El Salvador

2011 ◽  
Author(s):  
Walter Sosa-Escudero ◽  
Mariana Marchionni ◽  
Omar Arias
Keyword(s):  
Life Cycle ◽  
El Salvador ◽  
Unobserved Heterogeneity ◽  
Covariance Structure ◽  
State Dependence ◽  
Developed Countries ◽  
Income Shocks ◽  
Data Set ◽  
Panel Model ◽  
Transitory Shocks

This article uses a unique panel data set of rural El Salvador to investigate the main sources of persistence and variability in incomes. Our econometric framework validly reduces a general panel model to a dynamic linear model with a covariance structure that can be estimated efficiently with short panels. We find that life-cycle incomes are largely explained by the productive characteristics of families, such as education and access to public goods, and unobserved heterogeneity. Pure state dependence, arising from income shocks persistency, is of second order. In El Salvador, frequent transitory shocks are a more important source of income variation than in developed countries.

scholarly journals MPC Heterogeneity and Household Balance Sheets

2021 ◽  
Vol 13 (4) ◽  
pp. 1-54
Author(s):  
Andreas Fagereng ◽  
Martin B. Holm ◽  
Gisle J. Natvik
Keyword(s):  
Life Cycle ◽  
Time Profile ◽  
Income Shocks ◽  
Life Cycle Model ◽  
Cycle Model ◽  
Balance Sheets ◽  
Bequest Motive ◽  
Transitory Income ◽  
Conventional Models ◽  
Over Time

We use sizable lottery prizes in Norwegian administrative panel data to explore how transitory income shocks are spent and saved over time and how households’ marginal propensities to consume (MPCs) vary with household characteristics and shock size. We find that spending peaks in the year of winning and gradually reverts to normal within five years. Controlling for all items on households’ balance sheets and characteristics such as education and income, it is the amount won, age, and liquid assets that vary systematically with MPCs. Low-liquidity winners of the smallest prizes (around US$1,500) are estimated to spend all within the year of winning. The corresponding estimate for high-liquidity winners of large prizes (US$8, 300–150,000) is slightly below one-half. While conventional models will struggle to account for such high MPC levels, we show that a two-asset life cycle model with a realistic earnings profile and a luxury bequest motive can account for both the time profile of consumption responses and their systematic covariation with observables. (JEL D12, D15, E21, G51, H24)

Sign in / Sign up

Export Citation Format

Share Document