House Prices and Risk Sharing

Homeowners in the Panel Study of Income Dynamics are able to maintain a high level of consumption following job loss (or disability) in periods of rising local house prices while the consumption drop for homeowners who lose their job in times of lower house prices is substantial. These results are consistent with homeowners being able to access wealth gains when housing appreciates as witnessed by their ability to smooth consumption more than renters. A calibrated model of endogenous homeownership and consumption is able to reproduce the patterns in the data quite well and provides an interpretation of the empirical results.job displacement; disability; housing collateral

Childhood Determinants of Risk Aversion: The Long Shadow of Compulsory Education

We study the determinants of individual attitudes towards risk and,in particular,why some individuals exhibit extremely high risk aversion. Using data from the Panel Study of Income Dynamics we find that policy induced increases in high school graduation rates lead to significantly fewer individuals being highly risk averse in the next generation. Other significant determinants of risk aversion are age, sex, and parents' risk aversion. We verify that risk aversion matters for economic behavior in that it predicts individuals' volatility of income.schooling reforms; risk attitudes; intergenerational persistence

The Effect of Education on Equity Holdings

Abstract We study the effect of education on equity ownership in the form of stocks or mutual funds (outside of retirement accounts). We find a causal effect of education on stockholding using the number of colleges in the county where the respondent grew up as an instrument and data from the Panel Study of Income Dynamics. The effect is particularly strong for whites from non-privileged backgrounds. We explore the channels through which education affects equity holdings using the Wisconsin Longitudinal Survey and find that, controlling for family fixed effects, increased cognition and features associated with having a white collar job appear to be the main channels

Excess Smoothness of Consumption in an Estimated Life Cycle Model.” Mimeo

Abstract In the literature, econometricians typically assume that household income is the sum of a random walk permanent component and a transitory component, with uncorrelated permanent and transitory shocks. Using U.S. data on household wealth, consumption, and income I estimate a life cycle model where households smooth permanent and transitory income shocks by means of self-insurance, and find that household consumption is excessively smooth. That is, in the data consumption responds to income shocks to a lesser extent than in the model. To reconcile the model with the data, I explore the possibility that households have more information about components of income, transitory and permanent, than econometricians. I find that income shocks are negatively correlated and the model fits the data better but consumption is still excessively smooth. The model replicates the patterns in the data well when household information about components of income and partial risk sharing against permanent income shocks are allowed for

Informational Assumptions on Income Processes and Consumption in the Buffer Stock Model of Savings

Idiosyncratic household income is typically assumed to consist of several components. While the total income is observed and is often modelled as an integrated moving average process, individual components are not observed directly. In the literature, econometricians typically assume that household income is the sum of a random walk permanent component and a transitory component, with uncorrelated permanent and transitory shocks. This characterization is not innocuous since households may have better information on individual income components than econometricians do. I show that, for the same reduced form model of income, different models for the income components lead to sizeably different estimates of the marginal propensity to consume (MPC) out of shocks to current and lagged income, and the volatility of consumption changes relative to income changes in data generated by an infinite horizon buffer stock model. I further suggest that the MPC out of shocks to current and lagged income estimated from empirical micro data should help identify parameters of individual components of the income process, including the correlation between transitory and permanent shocks. I use the method of simulated moments (MSM) and data from the Panel Study of Income Dynamics (PSID) and the Consumer Expenditure Survey (CEX) to estimate a structural life cycle model of consumption. I also jointly estimate the parameters governing the income process. I find statistically significant negative contemporaneous correlation between permanent and transitory shocks to income and reasonable, precisely estimated values for the time discount factor and the relative risk aversion parameterBuffer stok model of savings, method of simulated moments, income processes, unobserved components models