In this article, I estimate how labor supply responds to anticipated wage growth, unanticipated wage growth, and wage risk using the 198993 panel section of the Bank of Italy Survey of Households' Income and Wealth (SHIW), which collects individual expectations of future wages. The use of subjective expectations has several advantages. First, they provide information on the evolution and riskiness of future wages that the econometrician may never hope to observe. Moreover, this avoids the need for specifying instruments for the growth rate of wages. Finally, forecast errors can be directly controlled for, thus avoiding inconsistency in short panels.

Recent theoretical work has shown the importance of measuring microeconomic uncertainty for models of both general and partial equilibrium under imperfect insurance. In this paper the assumption of i.i.d. income innovations used in previous empirical studies is removed and the focus of the analysis placed on models for the conditional variance of income shocks, which is related to the measure of risk emphasized by the theory. We first discriminate amongst various models of earnings determination that separate income shocks into idiosyncratic transitory and permanent components. We allow for education- and time-specific differences in the stochastic process for earnings and for measurement error. The conditional variance of the income shocks is modelled as a parsimonious ARCH process with both observable and unobserved heterogeneity. The empirical analysis is conducted on data drawn from the 1967-1992 Panel Study of Income Dynamics. We find strong evidence of sizeable ARCH effects as well as evidence of unobserved heterogeneity in the variances.

We provide a life-cycle framework for comparing insurance and disincentive effects of disability benefits. The risks that individuals face and the parameters of the Disability Insurance (DI ) program are estimated from consumption, health, disability insurance, and wage data. We characterize the effects of disability insurance and study how policy reforms impact behavior and welfare. DI features high rejection rates of disabled applicants and some acceptance of healthy applicants. Despite worse incentives, welfare increases as programs become less strict or generosity increases. Disability insurance interacts with welfare programs: making unconditional means-tested programs more generous improves disability insurance targeting and increases welfare.

This paper contributes to the debate regarding trends in consumption inequality in the United States. We present a new measure of consumption inequality based on the redesigned 1999-2011 PSID. We impute consumption to the families observed before 1999 using the more comprehensive consumption data available from 1999 onward. One advantage of this procedure is in sample verification of the quality of the imputation procedure; another is that it yields a long time series (1967-2010). Consumption inequality was stable in the 1970s, as was income inequality. It increased significantly after 1980. The Great Recession was associated with a decline in consumption inequality.

We show the extent of errors made in the award of disability insurance using matched survey-administrative data. False rejections (Type I errors) are widespread and characterized by large gender differences. Women with a severe, work-limiting, permanent impairment are 20 percentage points more likely to be rejected than men, controlling for the type of health condition, occupation, and a host of demographic characteristics. The differences by gender arise because women are more likely to be assessed as being able to find other work than observationally equivalent men. Despite this, after rejection, women with a self-reported work limitation do not return to work, compared to rejected women without a work limitation. We investigate whether these gender differences in Type I errors are due to women being in better health than men, to women having lower pain thresholds, to women applying more readily for disability insurance, or to women applying with harder-to-verify work limitations. None of these explanations are consistent with the data. By contrast, we find evidence suggesting that there are different acceptance thresholds for men and women.

We compare the empirical performance of a standard incomplete markets asset pricing model with that of a novel model with constrained Pareto‐optimal allocations. We represent the models’ stochastic discount factors in terms of the cross‐sectional distribution of consumption and use these representations to evaluate the models’ empirical implications. The first model is inconsistent with the equity premium in the United States, United Kingdom, and Italy. The second model is consistent with the equity premium and the risk‐free rate in all three countries if the coefficient of relative risk aversion is roughly 5 and the quarterly discount factor is less than 0.5.

We propose a new approach to identify the strength of the precautionary motive and the extent of self-insurance in response to earnings risk based on Euler equation estimates. To address endogeneity problems, we use Norwegian administrative data and instrument consumption and earnings volatility with the variance of firm-specific shocks. The instrument is valid because firms pass some of their productivity shocks onto wages; moreover, for most workers, firm shocks are hard to avoid. Our estimates suggest a coefficient of relative prudence of 2, in a very plausible range.

We evaluate the allocation of risk between firms and their workers using matched employer‐employee panel data. Unlike previous contributions, this paper focuses on idiosyncratic shocks to the firm, which are the correct empirical counterpart of the theoretical notion of diversifiable risk. We allow for both temporary and permanent shocks to output and find that firms absorb temporary fluctuations fully but insure workers against permanent shocks only partially. Risk‐sharing considerations can account for about 15 percent of overall earnings variability, the remainder originating from idiosyncratic shocks to individual workers. Our welfare calculations indicate that firms are an important vehicle of insurance provision.

We provide a systematic analysis of the properties of individual returns to wealth using 12 years of population data from Norway's administrative tax records. We document a number of novel results. First, individuals earn markedly different average returns on their net worth (a standard deviation of 22.1%) and on its components. Second, heterogeneity in returns does not arise merely from differences in the allocation of wealth between safe and risky assets: returns are heterogeneous even within narrow asset classes. Third, returns are positively correlated with wealth: moving from the 10th to the 90th percentile of the net worth distribution increases the return by 18 percentage points (and 10 percentage points if looking at net‐of‐tax returns). Fourth, individual wealth returns exhibit substantial persistence over time. We argue that while this persistence partly arises from stable differences in risk exposure and assets scale, it also reflects heterogeneity in sophistication and financial information, as well as entrepreneurial talent. Finally, wealth returns are correlated across generations. We discuss the implications of these findings for several strands of the wealth inequality debate.

We examine the link between wage and consumption inequality using a life-cycle model incorporating consumption and family labor supply decisions. We derive analytical expressions for the dynamics of consumption, hours, and earnings of two earners in the presence of correlated wage shocks, nonseparability, progressive taxation, and asset accumulation. The model is estimated using panel data for hours, earnings, assets, and consumption. We focus on family labor supply as an insurance mechanism and find strong evidence of smoothing of permanent wage shocks. Once family labor supply, assets, and taxes are properly accounted for there is little evidence of additional insurance.