Abstract
Based on administrative data from Statistics Norway, we find economically significant shifts in households' financial portfolios around individual structural breaks in labor-income volatility. According to our estimates, when income risk doubles, households reduce their risky share of financial assets by 5 percentage points, thus tempering their overall risk exposure. We show that our estimated risky share response is consistent with a standard portfolio choice model augmented with idiosyncratic, time-varying income volatility.
Abstract
Over the past few decades, the skilled-unskilled hours differential for US men increased when the skill premium rose sharply, in contrast with dominant income effects. Based on PSID data, we show that over the 1967-2000 period, skilled men experienced three times larger increase in wage volatility than unskilled men. With the rise in wage volatility, our general equilibrium incomplete markets model generates a 2.7 hours increase in the hours differential while it increased by 1.4 hours in the data. We find that hours adjustments are important for self-insurance in the short run, whereas precautionary savings play a crucial role eventually.
Abstract
The standard life-cycle model of household portfolio choice has difficulty generating a realistic age profile of risky share. These models not only imply a high risky share on average but also a steeply decreasing age profile, whereas the risky share is mildly increasing in the data. We introduce age-dependent labor-market uncertainty into an otherwise standard model. A great uncertainty in the labor market---due to high unemployment risk, frequent job turnovers, and an unknown career path---prevents young workers from taking too much risk in the financial market. As the labor-market uncertainty is resolved over time, workers start taking more risk in their financial portfolios.
Abstract
We investigate the welfare properties of the one-sector neoclassic growth model with uninsurable idiosyncratic shocks. We focus on the notion of constrained efficiency used in the general-equilibrium literature. Our characterization of constrained efficiency uses the first-order condition of a constrained planner's problem. This condition highlights the margins of relevance for whether capital is too high or too low: the factor composition of income of the (consumption-)poor. Using three calibrations commonly considered in the literature, we illustrate that there can be either over- or under-accumulation of capital in steady state and that the constrained optimum may or may not be consistent with a non-degenerate long-run distribution of wealth. For the calibration that roughly matches the income and wealth distribution, the constrained inefficiency of the market outcome is rather striking: it has much too low a steady-state capital stock.
Abstract
Using life insurance holdings by age, sex, and marital status, we infer how individuals value consumption in different demographic stages. We estimate equivalence scales and bequest motives simultaneously within a fully specified model where agents face U.S. demographics and save and purchase life insurance. Our findings indicate that individuals are very caring for dependents, that economies of scale are large, that children are very costly (or yield very high marginal utility), that wives with children produce lots of home goods, and that females display habits from marriage, while men do not. These findings contrast sharply with standard equivalence scales.