Income and Consumption: A Micro Semistructural Analysis with Pervasive Heterogeneity

TY - JOUR

T1 - Income and Consumption

T2 - A Micro Semistructural Analysis with Pervasive Heterogeneity

AU - Alan, Sule

AU - Browning, Martin

AU - Ejrnæs, Mette

PY - 2018/10/1

Y1 - 2018/10/1

N2 - We develop a model of consumption and income that allows for pervasive heterogeneity in the parameters of both processes. Introducing co-dependence between household income parameters and preference parameters, we also allow for heterogeneity in the impact of income shocks on consumption. We estimate the parameters of the model using a sample from the Panel Study of Income Dynamics, covering the period 1968–2009. We find considerable codependent heterogeneity in the parameters governing income and consumption processes. Our results suggest a great deal of heterogeneity in the reaction of consumption to income shocks, highlighting the heterogeneity in the self-insurance available to households.

AB - We develop a model of consumption and income that allows for pervasive heterogeneity in the parameters of both processes. Introducing co-dependence between household income parameters and preference parameters, we also allow for heterogeneity in the impact of income shocks on consumption. We estimate the parameters of the model using a sample from the Panel Study of Income Dynamics, covering the period 1968–2009. We find considerable codependent heterogeneity in the parameters governing income and consumption processes. Our results suggest a great deal of heterogeneity in the reaction of consumption to income shocks, highlighting the heterogeneity in the self-insurance available to households.

U2 - 10.1086/699186

DO - 10.1086/699186

M3 - Journal article

SN - 0022-3808

VL - 126

SP - 1827

EP - 1864

JO - Journal of Political Economy

JF - Journal of Political Economy

IS - 5

ER -