Higher-order income risk over the business cycle
- 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.
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| Author: | Christopher BuschORCiDGND, Alexander LudwigORCiDGND |
|---|---|
| URN: | urn:nbn:de:hebis:30:3-533777 |
| DOI: | https://doi.org/10.2139/ssrn.3562359 |
| Parent Title (English): | SAFE working paper series ; No. 274 |
| Series (Serial Number): | SAFE working paper (274) |
| Publisher: | SAFE |
| Place of publication: | Frankfurt am Main |
| Document Type: | Working Paper |
| Language: | English |
| Year of Completion: | 2020 |
| Year of first Publication: | 2020 |
| Publishing Institution: | Universitätsbibliothek Johann Christian Senckenberg |
| Release Date: | 2020/03/30 |
| Tag: | Business Cycle; GMM Estimation; Labor Income Risk; Life-Cycle Model; Persistent and Transitory Income Shocks; Risk Attitudes; Skewness |
| Issue: | March 24, 2020 |
| Page Number: | 86 |
| HeBIS-PPN: | 463992644 |
| Institutes: | Wirtschaftswissenschaften / Wirtschaftswissenschaften |
| Wissenschaftliche Zentren und koordinierte Programme / House of Finance (HoF) | |
| Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS) | |
| Wissenschaftliche Zentren und koordinierte Programme / Sustainable Architecture for Finance in Europe (SAFE) | |
| Dewey Decimal Classification: | 3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft |
| Sammlungen: | Universitätspublikationen |
| Licence (German): |  Deutsches Urheberrecht |
