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American Economic Review Vol. 104 No. 7 2014

Consumption and Labor Supply with Partial Insurance: An Analytical Framework

Jonathan Heathcote1; Kjetil Storesletten2; Giovanni L. Violante3

1 Federal Reserve Bank of Minneapolis, 90 Hennepin Avenue, Minneapolis, MN 55401 (e-mail: ) · 2 University of Oslo, Box 1095 Blindern, 0317 Oslo, Norway (e-mail: ) · 3 New York University, 19 West Fourth Street, New York, NY 10012-1119 (e-mail: )

open access

Abstract

We develop a model with partial insurance against idiosyncratic wage shocks to quantify risk sharing. Closed-form solutions are obtained for equilibrium allocations and for moments of the joint distribution of consumption, hours, and wages. We prove identification and demonstrate how labor supply data are informative about risk sharing. The model, estimated with US data over the period 1967–2006, implies that (i) 39 percent of permanent wage shocks pass through to consumption; (ii ) the share of wage risk insured increased until the early 1980s; and (iii) preference heterogeneity is important in accounting for observed dispersion in consumption and hours.

DOI
10.1257/aer.104.7.2075
Volume
104
Issue
7
Pages
2075-2126
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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