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Consumption and labor supply with partial insurance: An analytical framework

Author(s): Heathcote, J; Storesletten, K; Violante, Giovanni L.

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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.
Publication Date: Jul-2014
Citation: Heathcote, J, Storesletten, K, and Violante, GL. (2014). Consumption and labor supply with partial insurance: An analytical framework. American Economic Review, 104 (7), 2075 - 2126. doi:10.1257/aer.104.7.2075
DOI: doi:10.1257/aer.104.7.2075
ISSN: 0002-8282
Pages: 2075 - 2126
Type of Material: Journal Article
Journal/Proceeding Title: American Economic Review
Version: Final published version. Article is made available in OAR by the publisher's permission or policy.

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