Identifying heterogeneous income profiles using covariances of income levels and future growth rates

TY - JOUR

T1 - Identifying heterogeneous income profiles using covariances of income levels and future growth rates

AU - Druedahl, Jeppe

AU - Munk-Nielsen, Anders

PY - 2018/9

Y1 - 2018/9

N2 - This paper shows that a central implication of heterogeneous income profiles (HIP) is that the covariance between the level of income and future income growth rates must become strongly positive from about age 40. Covariances of income levels and future growth rates therefore have strong identifying power for HIP. We show that adding such moments to an estimation can reverse seemingly strong evidence of HIP. We show this both in a small sample Monte Carlo study and using PSID data. Our results are robust to including a fixed effect correlated with the HIP component.

AB - This paper shows that a central implication of heterogeneous income profiles (HIP) is that the covariance between the level of income and future income growth rates must become strongly positive from about age 40. Covariances of income levels and future growth rates therefore have strong identifying power for HIP. We show that adding such moments to an estimation can reverse seemingly strong evidence of HIP. We show this both in a small sample Monte Carlo study and using PSID data. Our results are robust to including a fixed effect correlated with the HIP component.

KW - Faculty of Social Sciences

KW - Income risk

KW - Heterogeneity

KW - Consumption-savings

U2 - 10.1016/j.jedc.2018.07.003

DO - 10.1016/j.jedc.2018.07.003

M3 - Journal article

SN - 0165-1889

VL - 94

SP - 24

EP - 42

JO - Journal of Economic Dynamics and Control

JF - Journal of Economic Dynamics and Control

ER -