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Consumption and labor supply with partial insurance: an analytical framework

Author

Listed:
  • 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.

Suggested Citation

  • Jonathan Heathcote & Kjetil Storesletten & Giovanni L. Violante, . "Consumption and labor supply with partial insurance: an analytical framework," Staff Report, Federal Reserve Bank of Minneapolis.
    • Handle: RePEc:fip:fedmsr:432
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    Citations

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    Cited by:

    1. Yi Wen, 2011. "Making sense of China’s astronomical foreign reserves," Working Papers 2011-018, Federal Reserve Bank of St. Louis.
    2. Guner, Nezih & Kaygusuz, Remzi & Ventura, Gustavo, 2012. "Taxing women: A macroeconomic analysis," Journal of Monetary Economics, Elsevier, vol. 59(1), pages 111-128.
    3. Moritz Kuhn, 2013. "Recursive Equilibria In An Aiyagari‐Style Economy With Permanent Income Shocks," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 54(3), pages 807-835, August.
    4. Hamish Low & Costas Meghir & Luigi Pistaferri, 2010. "Wage Risk and Employment Risk over the Life Cycle," American Economic Review, American Economic Association, vol. 100(4), pages 1432-1467, September.
    5. Guido Ruta & Piero Gottardi, 2009. "Equilibrium corporate finance," 2009 Meeting Papers 149, Society for Economic Dynamics.
    6. Yamada, Tomoaki, 2012. "Income risk, macroeconomic and demographic change, and economic inequality in Japan," Journal of Economic Dynamics and Control, Elsevier, vol. 36(1), pages 63-84.
    7. Richard Blundell & Luigi Pistaferri & Itay Saporta-Eksten, 2016. "Consumption Inequality and Family Labor Supply," American Economic Review, American Economic Association, vol. 106(2), pages 387-435, February.
    8. repec:esx:essedp:712 is not listed on IDEAS
    9. Jonathan Heathcote & Fabrizio Perri & Giovanni L. Violante, 2010. "Unequal We Stand: An Empirical Analysis of Economic Inequality in the United States: 1967-2006," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(1), pages 15-51, January.
    10. Bick, Alexander & Choi, Sekyu, 2013. "Revisiting the effect of household size on consumption over the life-cycle," Journal of Economic Dynamics and Control, Elsevier, vol. 37(12), pages 2998-3011.
    11. Yuriy Gorodnichenko & Klara Sabirianova Peter & Dmitriy Stolyarov, 2010. "Inequality and Volatility Moderation in Russia: Evidence from Micro-Level Panel Data on Consumption and Income," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(1), pages 209-237, January.
    12. Kemptner, Daniel, 2019. "Health-related life cycle risks and public insurance," Journal of Health Economics, Elsevier, vol. 65(C), pages 227-245.
    13. Haan, Peter & Prowse, Victoria, 2014. "Optimal Unemployment Insurance and Welfare Benefits in a Life-cycle model of Family Labor Supply and Savings," VfS Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100625, Verein für Socialpolitik / German Economic Association.
    14. Radim Bohacek & Hugo Rodríguez Mendizábal, "undated". "Misallocation of Capital in a Model of Endogenous Financial Intermediation and Insurance," Working Papers 543, Barcelona School of Economics.
    15. Michael J. Artis & Mathias Hoffmann, 2008. "Financial Globalization, International Business Cycles and Consumption Risk Sharing," Scandinavian Journal of Economics, Wiley Blackwell, vol. 110(3), pages 447-471, September.
    16. Greg Kaplan & Giovanni L. Violante, 2010. "How Much Consumption Insurance beyond Self-Insurance?," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(4), pages 53-87, October.
    17. Furlanetto, Francesco & Natvik, Gisle J. & Seneca, Martin, 2013. "Investment shocks and macroeconomic co-movement," Journal of Macroeconomics, Elsevier, vol. 37(C), pages 208-216.
    18. Yena Park, 2012. "Optimal Taxation in a Limited Commitment Economy," PIER Working Paper Archive 12-033, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    19. Sam Schulhofer-Wohl, . "Heterogeneity and tests of risk sharing," Staff Report, Federal Reserve Bank of Minneapolis.
    20. Jonathan Heathcote & Kjetil Storesletten & Giovanni L. Violante, 2009. "Quantitative Macroeconomics with Heterogeneous Households," Annual Review of Economics, Annual Reviews, vol. 1(1), pages 319-354, May.
    21. Guner, Nezih & Kaygusuz, Remzi & Ventura, Gustavo, 2008. "Taxation, Aggregates and the Household," IZA Discussion Papers 3318, Institute of Labor Economics (IZA).
    22. Emil Iantchev, 2013. "Asset-Pricing Implications of Biologically Based Non-Expected Utility," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(3), pages 497-510, July.
    23. José-Víctor Ríos-Rull & Frank Schorfheide & Cristina Fuentes-Albero & Maxym Kryshko & Raül Santaeulàlia-Llopis, 2009. "Methods versus Substance: Measuring the Effects of Technology Shocks on Hours," NBER Working Papers 15375, National Bureau of Economic Research, Inc.
    24. Nezih Guner & Remzi Kaygusuz & Gustavo Ventura, 2012. "Taxation and Household Labour Supply," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 79(3), pages 1113-1149.

    More about this item

    Keywords

    Consumption (Economics); Wages;

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