Consumption and Risk Sharing Over the Life Cycle

46 Pages Posted: 2 Nov 2000 Last revised: 8 May 2021

See all articles by Kjetil Storesletten

Kjetil Storesletten

University of Oslo - Department of Economics; Centre for Economic Policy Research (CEPR)

Chris Telmer

Carnegie Mellon University - David A. Tepper School of Business

Amir Yaron

University of Pennsylvania -- Wharton School of Business; National Bureau of Economic Research (NBER)

Date Written: November 2000

Abstract

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.

Suggested Citation

Storesletten, Kjetil and Telmer, Christopher I. and Yaron, Amir, Consumption and Risk Sharing Over the Life Cycle (November 2000). NBER Working Paper No. w7995, Available at SSRN: https://ssrn.com/abstract=248601

Kjetil Storesletten (Contact Author)

University of Oslo - Department of Economics ( email )

P.O. Box 1095 Blindern
N-0317 Oslo
Norway
+47 2284 4009 (Phone)
+47 2285 5035 (Fax)

HOME PAGE: http://folk.uio.no/kjstore/

Centre for Economic Policy Research (CEPR)

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United Kingdom

Christopher I. Telmer

Carnegie Mellon University - David A. Tepper School of Business ( email )

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(412) 268-6837 (Fax)

Amir Yaron

University of Pennsylvania -- Wharton School of Business ( email )

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United States
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215-898-6200 (Fax)

National Bureau of Economic Research (NBER) ( email )

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