TY  - JOUR
AU  - Heathcote,Jonathan
AU  - Storesletten,Kjetil
AU  - Violante,Giovanni L.
TI  - Insurance and Opportunities: A Welfare Analysis of Labor Market Risk
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 13673
PY  - 2007
Y2  - December 2007
UR  - http://www.nber.org/papers/w13673
L1  - http://www.nber.org/papers/w13673.pdf
N1  - Author contact info:
Jonathan Heathcote
Federal Reserve Bank of Minneapolis
Research Department
90 Hennepin Ave.
Minneapolis, MN 55401
Tel: (612) 204-6385
E-Mail: heathcote@minneapolisfed.org

Kjetil Storesletten
Federal Reserve Bank of Minneapolis
Research Department
90 Hennepin Ave.
Minneapolis, MN 55401
Tel: +47 22844009
E-Mail: kjetil.storesletten@econ.uio.no

Giovanni L. Violante
Department of Economics
New York University
19 W. 4th Street
New York, NY 10012-1119
Tel: 212/992-9771
Fax: 212/995-3932
E-Mail: glv2@nyu.edu
AB  - Using a model with constant relative risk-aversion preferences, endogenous labor supply and partial insurance against idiosyncratic wage risk, we provide an analytical characterization of three welfare effects: (a) the welfare effect of a rise in wage dispersion, (b) the welfare gain from completing markets, and (c) the welfare effect from eliminating risk. Our analysis reveals an important trade-off for these welfare calculations. On the one hand, higher wage uncertainty increases the cost associated with missing insurance markets. On the other hand, greater wage dispersion presents  opportunities to raise aggregate productivity by concentrating market work among more productive workers. Our welfare effects can be expressed in terms of the underlying parameters defining preferences and wage risk, or alternatively in terms of changes in observable second moments of the joint distribution over individual wages, consumption and hours.
ER  -