TY  - UNPD
A1  - Busch, Christopher
A1  - Ludwig, Alexander
T1  - Higher-order income risk over the business cycle
T2  - SAFE working paper series ; No. 274
N2  - We extend the canonical income process with persistent and transitory risk to shock distributions with left-skewness and excess kurtosis, to which we refer as higher- order risk. We estimate our extended income process by GMM for household data from the United States. We find countercyclical variance and procyclical skewness of persistent shocks. All shock distributions are highly leptokurtic. The existing tax and transfer system reduces dispersion and left-skewness of shocks. We then show that in a standard incomplete-markets life-cycle model, first, higher-order risk has sizable welfare implications, which depend crucially on risk attitudes of households; second, higher-order risk matters quantitatively for the welfare costs of cyclical idiosyncratic risk; third, higher-order risk has non-trivial implications for the degree of self-insurance against both transitory and persistent shocks.
T3  - SAFE working paper - 274 
KW  - Labor Income Risk
KW  - Business Cycle
KW  - GMM Estimation
KW  - Skewness
KW  - Persistent and Transitory Income Shocks
KW  - Risk Attitudes
KW  - Life-Cycle Model
Y1  - 2020
UR  - http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/53377
UR  - https://nbn-resolving.org/urn:nbn:de:hebis:30:3-533777
IS  - March 24, 2020
PB  - SAFE
CY  - Frankfurt am Main
ER  -