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128
Income and Wealth Heterogeneity in the Macroeconomy,
- Journal of Political Economy
, 1998
"... How do movements in the distribution of income and wealth affect the macroeconomy? We analyze this question using a calibrated version of the stochastic growth model with partially uninsurable idiosyncratic risk and movements in aggregate productivity. Our main finding is that, in the stationary st ..."
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Cited by 678 (11 self)
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How do movements in the distribution of income and wealth affect the macroeconomy? We analyze this question using a calibrated version of the stochastic growth model with partially uninsurable idiosyncratic risk and movements in aggregate productivity. Our main finding is that, in the stationary stochastic equilibrium, the behavior of the macroeconomic aggregates can be almost perfectly described using only the mean of the wealth distribution. This result is robust to substantial changes in both parameter values and model specification. Our benchmark model, whose only difference from the representative-agent framework is the existence of uninsurable idiosyncratic risk, displays far less cross-sectional dispersion [Journal of Political Economy, 1998, vol. 106, no. 5] © 1998 by The University of Chicago. All rights reserved. 0022-3808/98/0605-0003$02.50 867 868 journal of political economy and skewness in wealth than U.S. data. However, an extension that relies on a small amount of heterogeneity in thrift does succeed in replicating the key features of the wealth data. Furthermore, this extension features aggregate time series that depart significantly from permanent income behavior.
Portfolio choice in the presence of housing
- Review of Financial Studies
, 2005
"... . I would like to thank the editor, John Heaton, and two anonymous referees for comments that greatly improved this paper. This paper is a substantially revised version of chapter 4 of my ..."
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Cited by 138 (2 self)
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. I would like to thank the editor, John Heaton, and two anonymous referees for comments that greatly improved this paper. This paper is a substantially revised version of chapter 4 of my
Consumption and risk sharing over the life cycle
- Journal of Monetary Economics
, 2004
"... A striking feature of U.S. data on income and consumption is that inequality increases with age. This paper asks if individual-specific earnings risk can provide a coherent explanation. We find that it can. We construct an overlapping generations general equilibrium model in which households face un ..."
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Cited by 135 (7 self)
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A striking feature of U.S. data on income and consumption is that inequality increases with age. This paper asks if individual-specific earnings risk can provide a coherent explanation. We find that it can. We construct an overlapping generations general equilibrium model in which households face uninsurable earnings shocks over the course of their lifetimes. Earnings inequality is exogenous and is calibrated to match data from the U.S. Panel Study on Income Dynamics. Consumption inequality is endogenous and matches well data from the U.S. Consumer Expenditure Survey. The total risk households face is decomposed into that realized before entering the labor market and that realized throughout the working years. In welfare terms, the latter is found to be more important than the former.
Wealth Inequality and Intergenerational Links
, 2002
"... Previous work has had difficulty generating household saving behavior that makes the distribution of wealth much more concentrated than that of labor earnings, and that makes the richest households hold onto large amounts of wealth, even during very old age. I construct a quantitative, general equil ..."
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Cited by 84 (10 self)
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Previous work has had difficulty generating household saving behavior that makes the distribution of wealth much more concentrated than that of labor earnings, and that makes the richest households hold onto large amounts of wealth, even during very old age. I construct a quantitative, general equilibrium, overlapping-generations model in which parents and children are linked by accidental and voluntary bequests and by earnings ability. I show that voluntary bequests can explain the emergence of large estates, while accidental bequests alone cannot, and that adding earnings persistence within families increases wealth concentration even more. I also show that the introduction of a bequest motive generates lifetime savings profiles more consistent with the data.
Accounting for the U.S. Earnings and Wealth Inequality
- FORTHCOMING IN THE JOURNAL OF POLITICAL ECONOMY
, 2002
"... We show that a theory of earnings and wealth inequality based on the optimal choices of ex-ante identical households who face uninsured idiosyncratic shocks to their endowments of efficiency labor units accounts for the U.S. earnings and wealth inequality almost exactly. Relative to previous work, ..."
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Cited by 65 (1 self)
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We show that a theory of earnings and wealth inequality based on the optimal choices of ex-ante identical households who face uninsured idiosyncratic shocks to their endowments of efficiency labor units accounts for the U.S. earnings and wealth inequality almost exactly. Relative to previous work, we make three major changes to the way in which this basic theory is implemented: (i) we mix the main features of the dynastic and the life-cycle abstractions, that is, we assume that our households are altruistic, and that they go through the life-cycle stages of working-age and of retirement; (ii) we model explicitly some of the quantitative properties of the U.S. social security system; and (iii) we calibrate our model economies to the Lorenz curves of U.S. earnings and wealth as reported by the 1992 Survey of Consumer Finances. Furthermore, our theory succeeds in accounting for the observed earnings and wealth inequality in spite of the disincentives created by the mildly progressive U.S. income and estate tax systems, that are additional explicit features of our model economies.
Quantitative Macroeconomics with Heterogeneous Households
- Annual Review of Economics
, 2009
"... Macroeconomics is evolving from the study of aggregate dynamics to the study of the dynam-ics of the entire equilibrium distribution of allocations across individual economic actors. This article reviews the quantitative macroeconomic literature that focuses on household hetero-geneity, with a speci ..."
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Cited by 60 (5 self)
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Macroeconomics is evolving from the study of aggregate dynamics to the study of the dynam-ics of the entire equilibrium distribution of allocations across individual economic actors. This article reviews the quantitative macroeconomic literature that focuses on household hetero-geneity, with a special emphasis on the “standard ” incomplete markets model. We organize the vast literature according to three themes that are central to understanding how inequality matters for macroeconomics. First, what are the most important sources of individual risk and cross-sectional heterogeneity? Second, what are individuals ’ key channels of insurance? Third, how does idiosyncratic risk interact with aggregate risk? *This paper was prepared for Volume 1 of the Annual Review of Economics. Heathcote and Violante thank the National Science Foundation (Grant SES-0418029). The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System. 1
Investment and Liquidation in Renegotiation-Proof Contracts with Moral Hazard
- Journal of Monetary Economics
"... In a long-term contract with moral hazard, the liquidation of the firm can arise as the outcome of the optimal contract. However, if the future production capability or market opportunities remain unchanged, liquidation may not be free from renegotiation. Will the firm ever be liquidated if we allow ..."
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Cited by 56 (5 self)
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In a long-term contract with moral hazard, the liquidation of the firm can arise as the outcome of the optimal contract. However, if the future production capability or market opportunities remain unchanged, liquidation may not be free from renegotiation. Will the firm ever be liquidated if we allow for renegotiation? This paper shows that the firm can still be liquidated even though liquidation is not free from renegotiation in the long-term contract. In addition to liquidation, the renegotiation-proof contract generates important features of the investment behavior and dynamics of firms observed in the data.
Human capital and earnings distribution dynamics
- Journal of Monetary Economics
, 2006
"... Earnings heterogeneity plays a crucial role in modern macroeconomics. We document that mean earnings and measures of earnings dispersion and skewness all increase in US data over most of the working life-cycle for a typical cohort as the cohort ages. We show that (i) a human capital model can replic ..."
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Cited by 39 (1 self)
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Earnings heterogeneity plays a crucial role in modern macroeconomics. We document that mean earnings and measures of earnings dispersion and skewness all increase in US data over most of the working life-cycle for a typical cohort as the cohort ages. We show that (i) a human capital model can replicate these properties from the right distribution of initial human capital and learning ability, (ii) differences in learning ability are essential to produce an increase in earnings dispersion over the life cycle and (iii) differences in learning ability account for the bulk of the variation in the present value of earnings across agents. These findings emphasize the need to further understand the role and origins of initial conditions.
