Earnings, consumption and lifecycle choices
Costas Meghir,Luigi Pistaferri +1 more
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In this article, the authors discuss recent developments in the literature that studies how the dynamics of earnings and wages affect consumption choices over the life cycle, highlighting the role of persistence, information, size and insurability of changes in economic resources.Abstract:
We discuss recent developments in the literature that studies how the dynamics of earnings and wages affect consumption choices over the life cycle. We start by analyzing the theoretical impact of income changes on consumption—highlighting the role of persistence, information, size and insurability of changes in economic resources. We next examine the empirical contributions, distinguishing between papers that use only income data and those that use both income and consumption data. The latter do this for two purposes. First, one can make explicit assumptions about the structure of credit and insurance markets and identify the income process or the information set of the individuals. Second, one can assume that the income process or the amount of information that consumers have are known and test the implications of the theory. In general there is an identification issue that has only recently being addressed with better data or better “experiments”. We conclude with a discussion of the literature that endogenizes people’s earnings and therefore change the nature of risk faced by households.read more
Citations
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Journal ArticleDOI
Sources of Lifetime Inequality
TL;DR: For example, this paper found that differences in initial conditions account for more of the variation in lifetime earnings, lifetime wealth, and lifetime utility than do differences in shocks received over the working lifetime.
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Learning by working in big cities
Jorge De la Roca,Diego Puga +1 more
TL;DR: In this paper, the authors consider three reasons: spatial sorting of initially more productive workers, static advantages from workers' current location, and learning by working in bigger cities and find that workers in big cities do not have higher initial ability as reflected in fixed effects.
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Consumption inequality and family labor supply
TL;DR: In this article, the authors examine the link between wage and consumption inequality using a life-cycle model incorporating consumption and family labor supply decisions, and derive analytical expressions for the dynamics of consumption, hours and earnings of two earners in the presence of correlated wage shocks, nonseparability, progressive taxation, and asset accumulation.
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The Dynamics of Inequality
TL;DR: The authors show that standard theories, which build on a random growth mechanism, generate transition dynamics that are too slow relative to those observed in the data and suggest two parsimonious deviations from the canonical model that can explain such changes: scale dependence that may arise from changes in skill prices and type dependence, that is, the presence of some high-growth types.
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Fiscal Policy and MPC Heterogeneity
Tullio Jappelli,Luigi Pistaferri +1 more
TL;DR: The authors used responses to survey questions in the 2010 Italian Survey of Household Income and Wealth that ask consumers how much of an unexpected transitory income change they would consume, and found substantial heterogeneity in the distribution, as households with low cash-on-hand exhibit a much higher MPC than affluent households.
References
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Book
General Theory of Employment, Interest and Money
TL;DR: In this article, a general theory of the rate of interest was proposed, and the subjective and objective factors of the propensity to consume and the multiplier were considered, as well as the psychological and business incentives to invest.
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The General Theory of Employment, Interest and Money.
Book
Risk, Uncertainty and Profit
TL;DR: In Risk, Uncertainty and Profit, Frank Knight explored the riddle of profitability in a competitive market profit should not be possible under competitive conditions, as the entry of new entrepreneurs would drive prices down and nullify margins, however evidence abounds of competitive yet profitable markets as mentioned in this paper.
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Estimating vector autoregressions with panel data
TL;DR: In this article, the authors consider estimation and testing of vector autoregressio n coefficients in panel data, and apply the techniques to analyze the dynamic relationships between wages an d hours worked in two samples of American males.