TY  - JOUR
AU  - Storesletten,Kjetil
AU  - Telmer,Chris I.
AU  - Yaron,Amir
TI  - Consumption and Risk Sharing Over the Life Cycle
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 7995
PY  - 2000
Y2  - November 2000
UR  - http://www.nber.org/papers/w7995
L1  - http://www.nber.org/papers/w7995.pdf
N1  - Author contact info:
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

Amir Yaron
The Wharton School
University of Pennsylvania
2256 Steinberg-Dietrich Hall
Philadelphia, PA 19104-6367
Tel: 215/898-1241
Fax: 215/898-6200
E-Mail: yaron@wharton.upenn.edu
AB  - A striking feature of U.S. data on income and consumption is that inequality increases with age.  Using both panel data and an equilibrium life cycle model, we argue that this is informative for understanding the importance and the characteristics of idiosyncratic labor market risk.  We find that uncertainty distributed throughout the working years accounts for 40 percent of life time uncertainty, with the remainder being realized prior to entering the labor market.  We estimate that the shocks received over the life cycle contain a highly persistent component, with an autocorrelation coefficient between 0.98 and unity.  The joint behavior of earnings and consumption inequality, interpreted using our model, adds to the body of evidence suggesting that labor market risks are imperfectly pooled and that a precautionary motive is an important aspect of U.S. savings behavior.  The restrictions imposed by general equilibrium theory play an important role in arriving at each of these conclusions.
ER  -